3 Key Economic Questions
Because economic resources are
limited, every society must answer 3
economic questions…..
1.
What goods and services should be
produced?
What should our society produce to satisfy our needs
and wants?
Because of our limited resources, each production
decision that a society makes comes at an
opportunity cost.
2. How should these goods and services be
produced?
All things produced require land labor and capital
How should they be combined to produce different
goods and services?
3. Who consumes these goods and services?
Who gets to drive luxury cars and who can only
afford to ride the bus?
Societies must decide how to distribute the available
goods and services.
People create economic systems to
answer the 3 economic questions
However, each economic system will
answer the 3 economic questions
differently based on their beliefs of
various economic goals.
Broad Economic Social Goals
Economic Efficiency
How well productive resources are allocated to produce goods and
services
Getting more for less, high output for low cost
Economic Equity
What is “fair”?
What people think is right and wrong.
Providing equal opportunity or equality of income.
Broad Social Goals continued…
Economic Freedom
Freedom for consumers to spend/save income, choose jobs, and
establish new businesses and close old ones.
Economic Growth
Increase production of goods and services over time.
Measured by changes in level of GDP
Economic Security
Protecting consumers, producers, and resource owners from risks that
exist in society.
Secure from events that can not be controlled.
Broad Social Goals continued…
Price Stability
Avoiding inflation/deflation
Economic Stability
- Keeping economic growth
reasonably smooth and steady.
Full Employment
Occurs when an economy’s scarce resources, especially labor, are fully
utilized.
Environmental Protection
Protecting natural resources and creating regulations against pollution,
overpopulation, etc.
Economic Systems
Traditional Economy
Relies on habit, custom or ritual to decide what is produced,
how it’s produced, and to who.
Minimal innovation or change.
Revolves around the family; based on age, status, and gender.
Slow to adopt new technology or radical ideas.
Lack modern conveniences and have low standard of living.
Economic Systems continued…
Command Economy
Central gov’t decides how to answer 3 economic questions.
Gov’t owns both land and capital; controls where indivduals
work and wages paid.
Communism: All economic and political power rests in the hands
of the central gov’t.
Economic Systems continued…
Market Economy
Economic decisions are made by individuals and based on
exchange and trade.
Choices made by individuals determine what gets made, how
and who consumes the goods and services produced.
Individuals and private businesses own the factors of production
(resources); make what they want and buy what they want.
Circular Flow Model of a Market Economy
Circular Flow Model of a Market Economy
Business Firms
Households
Economic Systems continued…
Mixed Economy
Market-based economic systems in which gov’t plays a limited
role.
Examples: Public Education, Mass Transit, laws protecting property
rights, patent laws.