Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
1. What to Produce?
The problem of scarcity imposes a restriction
on the ability to produce everything we want
during a given period, so the choice to
produce “more” of a good requires producing
“less” of another good.
Guns vs. Butter
Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
2. How to Produce?
Vs.
How do we mix technology and scarce resources
in order to produce goods and services?
Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
3. For Whom to Produce?
Society must have a method to decide
who will be “rich” and who will be “poor”.
Ch. 2 - ECONOMIC SYSTEMS
5 Economic Goals
Economic
Efficiency
Making the most of resources
Economic
Freedom
Freedom from government intervention in the
Economic
Freedom
production
of goods
and services
Economic Efficiency
Assurance that goods and services will be available ,
Economic Security
payments
will be made
time, and a safety net will
Economic
Security
andon
Predictability
and Predictability
protect individuals in times of economic disaster
Fair distribution of wealth
Economic Equity
Economic Equity
Economic Growth Innovation leads to economic growth, and economic
Economic
Growth
andstandard
Innovation
growth leads
to a higher
of living
and Innovation
Ch. 2 - ECONOMIC SYSTEMS
Traditional Economies
Relies on habit, or ritual to decide how to
answer the 3 economic questions.
• Revolves around the family
• Work divided along gender lines
• Agricultural and hunting practices usually dominate the economy
• Slow to adopt new technology or ideas
Ch. 2 - ECONOMIC SYSTEMS
Centrally Planned (Command) Economies
The government owns both the land and capital and decides on behalf of the
people how to answer the 3 economic questions
• Government controls all aspects of production
• Socialism – government owns some FOP
• Karl Marx – The Communist Manifesto
Ch. 2 - ECONOMIC SYSTEMS
Free Market Economies
Individuals and privately owned businesses own the factors of
production and decide how to answer the 3 economic questions
• Specialization of tasks makes the economy more efficient
• Everyone acts in their own self-interest
• There is no government intervention
• Laissez Faire
Adam Smith’s Invisible Hand
Self-interest and competition work
together to regulate the
marketplace
Ch. 2 - ECONOMIC SYSTEMS
Circular Flow of Money
$
Factor Market
$
$
$ $
Households
Businesses
Product Market
$ $
$
$
$
Ch. 2 - ECONOMIC SYSTEMS
Mixed Economies
The people answer the 3 economic questions with some
intervention from the government to account for market failures
• Economic decisions are made by individuals with government oversight
• Government is a key component of economic activity
• All nations exist in the “mixed economy continuum”
Centrally Planned
Free Market
Iran
N. Korea
Cuba
France
Russia
Peru
United
Kingdom
Canada
United States
Singapore