1. Political and Economic Analysis
Chapter 3

2. What is an economy?
Section 3.1

3. Objectives Define the concept of an economy
List the factors of production
Explain the concept of scarcity
Discuss how traditional, market, command, and mixed economies answer the three basic economic questions
Cite examples of various economic systems

4. Key Terms Economy Resources Factors of production Infrastructure
Entrepreneurship
Scarcity
Traditional economy
Market economy
Command economy

5. Economic Systems Economy (economic system)
the organized way a nation provides for the needs and wants of its people.
A nation chooses how to use its resources to produce and distribute goods and services.
A country’s resources determine economic activities, such as manufacturing, buying, selling, transporting, and investing.

6. Economic Systems Resources
All the things used in producing goods and services.
Economists use the term factors of production when they talk about resources
4 categories
Land (tangible)
Labor (intangible)
Capital (tangible)
Entrepreneurship (intangible)

7. Economic Systems Resources Land Labor Capital Entrepreneurship
Includes everything contained in the earth or found in the seas.
Labor
Refers to all the people who work
Includes all part-time and full-time workers, managers, and professional people
Capital
Money to start and operate a business
Entrepreneurship
Skills of people who are willing to invest their time and money to run a business.

8. Scarcity Different economies have different amounts of resources
The difference between wants and needs and available resources is called scarcity
Forces nations to make economic choices

9. How Does An Economy Work?
Nations must answer three basic questions when deciding how to use their limited resources
Which goods and services should be produced?
How should the goods and services be produced?
For whom should the goods and services be produced?
The way nations answer these questions defines their economic systems

10. How Does An Economy Work?
Based on the way nations answer the basic questions they are classified into three broad categories
Traditional
Market
Command

11. Traditional Economies
Traditional Economy
Traditions and rituals answer the basic questions of what, how, and for whom.
Often based on cultural or religious practices and ideals have been passed from one generation to the next.
Activities are assigned through tradition rather than by choice

12. Traditional Economies
What?
In a traditional economy there is little choice as to what to produce. If people belong to a community of farmers, they farm for generations.
How?
The potter whose family has made clay pots for generations will continue to follow the practices of his or her ancestors
For whom?
Tradition regulates who buys and sells and where and how the exchange takes place

13. Market Economies Market Economy
No government involvement in economic decisions
Individuals and companies own the means of production
Businesses compete for consumers

14. Market Economies
The government lets the market answer the three basic economic questions
What?
Consumers decide what should be produced in a market economy through the purchases that they make in the marketplace
How?
Businesses in a market economy decide how to produce goods and services
Must be competitive to produce quality products at lower prices
For whom?
The people who have more money are able to buy more goods and services

15. Command Economies Command Economy
A system in which a country’s government makes economic decisions and decides what, when, and how much will be produced and distributed.

16. Command Economies
The government is responsible for answering the three basic economic questions
What?
One person or a group of government officials decides what products are needed based on what they believe is important
How?
Government decides how goods and services will be produced
Controls all employment and benefits
For whom?
The government decides who will receive what is produced.

17. Mixed Economies
No economy is purely a traditional, market, or command economy
The USA is considered a mixed economy with leanings toward a market economy
There is some government involvement through the laws and regulations that businesses must follow.
All economies in the world today are mixed
Depends on how much a government interferes with the free market

18. The three political philosophies that have shaped world economies are:
Capitalism,
Socialism
Communism

19. Capitalism Capitalism Political Foundations of Capitalism
A political and economic philosophy characterized by marketplace competition and private ownership of businesses.
Same as free enterprise
Government is concerned about its people and cares for those who cannot care for themselves.
Political Foundations of Capitalism
Democracy
Believe that political power should be in the hands of the people

20. Communism Communism Characteristics of a Communist Country
Social, political, and economic philosophy in which the government, usually authoritarian, controls the factors of production.
There is no private ownership of property or capital.
Theory is that societal classes are eliminated
Characteristics of a Communist Country
All people who are able to work are assigned jobs
The government decides the type of schooling people will receive also tells them where to live.
Low prices for food and housing subsidies
Medical care is free
Little or no economic freedom
No financial incentive for people to increase their productivity

21. Socialism
Differ from capitalist nations in the increased amount of government involvement in the economy
Main goal is to meet basic needs for all and to provide employment for many.
Characteristics of Socialist Countries
Tend to have more social services to ensure a certain standard of living for everyone
Medical care and education is free or low cost
System for pensions and elderly care
Businesses and individuals pay much higher taxes than those in capitalist countries

22. Socialism The Role of Government in Socialist Countries
Government runs key industries and make all economic decisions
Examples
Canada
Germany
Sweden

23. Economies in Transition
Most Eastern European countries that were once communist satellites have moved toward global market economies and more democratic forms of government
State owned industries have been privatized in many of these nations
Privatization
The process of governments selling government-owned businesses to private individuals or businesses

24. Economies in Transition
A Move Toward Privatization
Socialist countries are selling some of their state-run businesses to help balance their budgets
Great Britain sold its national phone company, national steel company, national sugar company, and several others.
Great Britain also privatized British Airways and it has become Europe’s number-one airline

25. Economies in Transition
Developing Economies
Developing economies are mostly poor countries with little industrialization that are trying to become more prosperous and develop their infrastructure.
Success depends on:
Improving education levels of their labor force
Directing and using foreign investment efficiently

26. Section 3.1 Questions
Explain how the infrastructure of a country can be related to the factors of production.
What three broad categories do economists use to classify all types of economic systems?
In which economic system does the government let the market answer the three basic economic questions?
In a country with a population of 290,342,554, how many people would be considered below the poverty line if the percentage in that category was 12.7 percent?