Chapter 2: Economic Systems
Section 1: Answering the
Three Economics
Questions
Economic System
• Method used by a society to
produce & distribute goods &
services
–Which economic system a
society employs depends on
that society’s goals & values
3 Key Economic Questions
• What goods & services should be
produced?
–Each society must decide what
to produce in order to satisfy its
needs & wants
• How should goods & services be
produced?
–All require land, labor, & capital &
can be combined in different ways
• Who consumes goods & services?
–Societies must decide how to
distribute the available goods &
services
–Determined by how societies
choose to distribute income
• Factor payments- income people
receive for supplying land, labor, &
capital
–Landowners receive rent, workers
receive wages, & those who lend
money to build factories or buy
machinery receive interest
–Entrepreneurs earn profits if their
enterprises succeed
• The question of who gets to consume
which goods & services lies at the very
heart of the differences between
economic systems
–Each society answers the question of
distribution based on its unique
combination of social values & goals
Economic Goals & Societal Values
• Economic efficiency
–Making the most of resources
–Knowing the best way to
produce a product & cut waste
• Economic Freedom
–People all over the world face
limitations on economic freedom
–Freedom from government
intervention in the production &
distribution of goods & services
• Economic Security & Predictability
–Reassures people that goods & services
will be available when they need them &
that they can count on receiving
expected payments on time
–Government should provide safety nets
• Injuries, layoffs, natural disasters, or
severe shortages
• Base income for retired persons
• Economic Equity
–Each society must decide the
best way to divide its economic
pie
–Many people believe in equal
pay for equal work, but society
doesn’t value all jobs equally
• Economic Growth & Innovation
–A nation’s economy must grow for a
nation to improve its standard of living
–Economies must grow to provide new
jobs & income for people
–Innovation plays a huge role in growth
• Increases the efficiency of production
& ushers in new goods & services
• Additional goals
–Environmental protection, full
employment, universal medical care
–All nations must prioritize their
economic goals
–Achieving any economic goal
comes only with some kind of
economic trade off
Economies & Values
• Four systems, each reflect a
different prioritization of
economic goals & values of
those societies
Traditional Economies
• Relies on habit, custom, or ritual to
produce, how to produce it, & to
whom to distribute it
–Little room for innovation or change
–Revolves around the family
• Work tends to be divided along
gender lines
• Usually communities that tend to stay
relatively small & close
–Work to support entire groups
• Agriculture & hunting practices usually
lie at the heart of the people’s lives,
laws & religious beliefs
• Have few mechanisms to deal
effectively with the effects of
environmental disasters (flood, drought)
–Tend to remain stagnant, resisting
change
• Slow to adopt new technology or radical
new ideas
• Lack modern conveniences & have a
low standard of living
Market Economies
• Decisions are made by individuals &
are based on exchange or trade
–Choices made by individuals
determine what gets made & how,
as well as who consumes the goods
& services
–Free market or capitalism
Command Economies
• AKA Centrally planned economy
–Central government alone
decides how to answer all
three key economic questions
Mixed Economies
• Market based economic
system in which government
plays a limited role