Chapter 3
Section 1
Answering the Three Economics Questions
pp. 23-27
The Three Economic Questions
• What do we produce?
• How do we produce it?
• Who consumes what is
produced?
Economic System
• The method
used by a
society to
produce and
distribute goods
and services
Factor Payments
• The income people
receive for supplying
factors of production
(land, labor, and capital)
patriotism
• The love of one’s
country; the passion
that inspires a person
to serve his or her
country
Safety Net
• Government
programs that protect
people experiencing
unfavorable economic
conditions
Standard of Living
• Level of economic
prosperity
Traditional Economy
• Economic system that
relies on habit,
custom, or ritual to
decide questions of
production and
consumption of goods
and services
Market Economy
• Economic system in
which decisions on
production and
consumption of goods
and services are
based on voluntary
exchange in markets
Centrally-Planned Economy
• Economic system in
which the central
government makes all
decisions on the
production and
consumption of goods
and services
• Also a “Command
Economy”
Mixed Economy
• Market-based economic system
with limited government
involvement
Why are not all people paid the
same amount in factor payments
for the resources they provide?
• Factor payments differ because societies place
different values on different resources and
products.
Two examples of unequal factor
payments . . .
• A doctor’s wages vs.
landscapers wages
Why do governments provide
safety nets for their citizens?
• Governments provide
safety nets to fulfill
the goal of economic
security and
predictability.
Type of Economy
Free Market
Traditional
Economy
CentrallyPlanned
(Command)
Economy
Mixed
Economy
Characteristics (How
is it different from
the rest?)
Example (What
country or region
has this type of
economy?)
(List a country with
a mixed economy
which is mostly
free market)
Societal values of
people performing
in this economy
Ch 2, Sec. 2
• The Free Market
– Explain why markets
exist
– Analyze a circular flow
model of free market
economy
– Understand the selfregulating nature of
the marketplace
– Identify the
advantages of a free
market economy
market
• An arrangement that
allows buyers and
sellers to exchange
things
specialization
• The concentration of
the productive efforts
of individuals and
firms on a limited
number of activities
• Specialization makes
us more efficient. It is
much easier to learn
one task very well
than to learn them all.
household
• A person or group of
people living in the
same residence
firm
• An organization that
uses resources to
produce a product,
which it then sells
Factor Market
• Market in which firms
purchase the factors of
production from households
profit
• The financial gain
made in a transaction
Product Market
• The market in which
households purchase
the goods and
services that firms
produce
Self-Interest
• One’s own personal
gain
incentive
• An expectation that
encourages people to
behave a certain way
competition
• The struggle among
producers for the
dollars of consumers
Invisible Hand
• A term
economists
use to describe
the selfregulating
nature of the
marketplace
Consumer sovereignty
• The power of
consumers to decide
what gets produced
Why is economic equity difficult to
achieve in a free market economy?
• Economic equity is difficult to achieve
in a free market economy because
not every person functions in the
market with the same skills and
abilities, and therefore differences in
compensation arise.
You and your friends decided to
wash cars to make some money.
• Describe how the
three key economic
questions arae
answered with this
enterprise.
• What good or service
is produced?
• How is it produced?
• Who consumes the
good or service?
Adam Smith
• Scottish economist
• Lived 1723 – 1790
• Wrote “Wealth of
Nations”
• Published 1776
What forces make up the “invisible
hand”?
Self-Interest and
Competition
• Smith meant that the combination of consumers’
self-interest and competition among firms would
naturally lead to an economy in which
consumers can buy products they want at
reasonable prices.
What is laissez faire?
• “let them do as they
please”
• Government should
not interfere with the
economy
• Individuals would be
free to pursue their
own interests if a
market is to run
smoothly
Key Terms/Questions, Ch 2,
Section 3
• Centrally-Planned (Command)
Economies
Socialism
• A social and political
philosophy based on
the belief that
democratic means
should be used to
evenly distribute
wealth throughout a
society
Authoritarian
• Requiring strict
obedience to an
authority, such as a
dictator
collective
• Large farm leases
from the state to
groups of peasant
farmers
Heavy Industry
• Industry that requires
a large capital
investment and that
produces items used
in other industries
How are socialism and communism
different?
• In socialist countries
the government often
owns major
industries. Socialism
has been achieved
peacefully through
democracy.
• Communist
governments are
authoritarian
Why did Soviet collectives offer
little incentive to farmers ?
• The government paid
farmers a set wages
and told them what to
produce, thus
providing very little
incentive to produce
more or to produce
goods more
efficiently.
Why do centrally-planned
economies have difficulty
meeting consumer needs?
• Centrally-planned economies
eliminate competition, giving
businesses no incentive to
produce consumer goods of
high quality. Also, the large
bureaucracy needed in this type
of economy is not flexible
enough to respond to consumer
demands.
What problems has Russia
experienced in switching from a
centrally-planned to a free
market economy?
• Crime, corruption, financial
difficulties, and food
shortages
Why would Western nations be
willing to make loans to Russia?
• Problems may arise from
a nation armed with
thousands of nuclear
weapons being thrown
into chaos.
• Also, it is economically
desirable for Russia to be
economically sound and
able to buy Western
goods and to be able to
produce goods for sale.