Chapter 2 – Economic Systems

Chapter 2 – Economic Systems
Section 1 – Answering economic Questions
The Three Economic Questions
• Every society must answer three questions:
– What goods and services should be produced?
– How should these goods and services be produced?
– Who consumes these goods and services?
How a society answers these questions depends on how it ___________ different
economic ________________.
As a result, four different economic systems have developed in response to these
three questions.
What goods and services should be produced?
• Each _________________ must decide what to produce in order to satisfy its
Often difficult to distinguish wants and needs
Critical questions arise:
How much of our resources should we devote to __________________________,
______________________, public _______________ and welfare, or consumer
Which consumer goods should we produce?
Because of ___________________ resources, each decision a society makes
comes at an _____________________________.
How should these goods and services be produced?
How do we use our ________________________ to produce goods and services?
– Electricity with oil, solar or nuclear energy?
– Classes with 20 or 30 students?
– Corporate farms vs. family farms?
Countless ways to produce all things we _____________________________
All require _____________, _____________, _________________
Must determine these ________________ of production and the best way to use
them to _______________ efficiency on production possibilities curve
Who consumes these goods and services?
Societies must decide how to _______________ the available goods and services.
Who gets:
– Luxury car vs. bus ticket?
– Concert tickets vs stay home?
– Well balanced diet vs hot dogs every meal?
Answer is determined how societies choose to distribute __________________.
Factor Payments
The _________________ people ________________ for supplying factors of
production – land, labor, capital…or entrepreneurship
Simply put: how much ______________ you make for the __________________.
Landowners – rent
Workers – wages
Lenders – interest
Entrepreneurs – profits (hopefully)
How much we pay the ______________ of the factors of production is
determined by each ___________ based on its own unique combination of social
Societies answer the three economic questions based on their values.
Economic Goals
 Economic efficiency - Making the _______________ of resources – societies
try to _________________ what they can get for the ________________
they a have to work with
Economic freedom - Freedom from government ____________________ in
the production and distribution of goods and services. The economic systems
of different ______________ allow different degrees of economic
_________. People all over the world face ___________________ on
economic freedoms.
Economic security and predictability - ___________________ that goods and
services will be __________________, payments will be made
___________, and a safety net will _______________ individuals in times
of economic ______________________. Ex: milk & bread at the store;
paychecks on time; SAFETY NET for natural disasters, job loss, injuries provided
by govt to protect people; base income for retired & elderly so they can support
Economic equity - Fair distribution of ________________. Most societies
believe in __________________ for __________________ but society
does not value all jobs _________________. All not able to work.
Economic growth and innovation - Innovation leads to economic __________,
and economic growth leads to a higher ___________________________.
Economy must grow to provide new ____________ and ______________
for people. Innovation in technology increases __________________ of
production & usher in new goods and services.
Other goals - Societies pursue additional goals, such as environmental
protection, full employment, universal healthcare. Nations must
___________ in order of importance. Achieving any ________ comes
with some kind of ______________________.
Four Economic Systems
_______________________ economies rely on habit, ______________, or ritual
to decide what to produce, how to produce it, and to whom to distribute it.
In a ________________ economy, economic decisions are made by ___________
and are based on exchange, or trade.
In a ____________________________ (command) economy the central
________________________ makes all _____________ about the production
and consumption of goods and services.
__________________ economies are systems that combine _______________
and the _________________________ with limited __________________