1. Economic Systems 3 Key Economic Questions

2. What is an economic system? The method used by a society to produce and distribute goods and services.

3. GOODS: Physical articles that have been produced for sale or use. –Examples: Food, Clothing, Cars SERVICES: Work done by someone else for which a consumer, business, or government is willing to pay. –Examples: Teaching, Gardening, Childcare

4. To form an economic system, a society must answer 3 important questions...

5. Three Economic Questions 1.What goods will be produced? –Due to scarcity, every country must choose what to produce, therefore giving up the opportunity to produce other goods. –What will consumers be willing and able to buy? –What price and quantity will be profitable?

6. Three Economic Questions 2. How will the goods be produced? –Will production decisions be made by individuals or by the government? –Will producers use existing technology or new technology? –Domestically or in foreign countries, manually or using technology? –The most efficient and reasonable way

7. Three Economic Questions 3. For whom will the goods be produced? –Will the government decide? Will price decide? For those who can afford and are willing to buy them? –Will goods be produced for the purpose of trade with other countries?

8. Who Has Decision-Making Power in Each Economic System: Individuals, but with some government involvement. Mixed Economy: Central Government – officials (elected or unelected) Centrally Planned/ Command Economy: Individuals – Voluntary Exchange (Invisible Hand) Market Economy: Custom – Families & Clans Traditional Economy:

9. How are the 3 Key Economic Questions addressed in each system?

10. 2 major Economic Systems Free Enterprise/ Capitalism Free Enterprise/ Capitalism individuals own most, if not all, the resources and control their use Also called market economy Also called market economy Socialism/ Socialism/ Communism- government controls and may own many of the resources. Also called command economy Also called command economy

11. Major Differences Between the 2 Resources Resources Governments role in the Economy Governments role in the Economy Economic Plans Economic Plans Income distribution Income distribution Controlling prices Controlling prices Private property Private property

12. Mixed Economy A country may contain some characteristics of free enterprise and socialism A country may contain some characteristics of free enterprise and socialism United States is considered a free enterprise nation but it also has a few features of socialism = mixed economy United States is considered a free enterprise nation but it also has a few features of socialism = mixed economy –Most resources owned by private individuals –Government plays a role, some prices controlled

14. Smith-Self Interest -Self interest leads to good for not only individual, but others too -”from the minute we enter this world until the day we go to our graves, we feel a desire to make ourselves better off”. -This leads to hard work, taking risks, and benefits others through our activities -led by an “invisible hand”. Ex. butcher and baker do not give us our dinner because they love to assist us, but they can’t get what they want until they give us what we want.

15. The Invisible Hand of the Market Economy

16. Labor Theory of Value Created by Karl Marx Created by Karl Marx Def: all value of any item, is determined by the necessary labor time needed to produce that item. Def: all value of any item, is determined by the necessary labor time needed to produce that item. Example: If it takes 5 hours of labor time to produce a chair and 10 hours of labor to produce a table, then the table is twice as valuable as the chair. Example: If it takes 5 hours of labor time to produce a chair and 10 hours of labor to produce a table, then the table is twice as valuable as the chair.

17. Question Why does the government provide national defense and not private business? Why does the government provide national defense and not private business? –Because not all who benefit from it would be willing to pay for it.