What are the three
Economic Questions?
Students will compare the major
economic systems in the world and
examine their ability to provide citizens
with social and economic freedoms.
The Three Basic Economic
Questions
1. What goods and services should be
produced?
2. How should these goods and services
be produced?
3. Who consumes these goods and
services?
What goods and services should
be produced?
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Basic Needs- food, clothing and shelter
Problems in Modern Societies- How many resources do we devote to national
defense, education, public health, welfare,
consumer goods?
- What consumer goods should
we produce?
How should these goods and
services be produced?
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Although there are countless ways to create all the
things we want and need, all require land, labor and
capital
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The factors of production can be combined in
different ways
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Should we produce electricity with oil, solar power,
nuclear, water or coal?
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Should teachers have 20 or 50 students in a class?
Who consumes these goods and
services?
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How do we distribute abundance?
• Who gets to eat a balanced diet and who doesn’t?
• Who get to buy a luxury car and who can’t afford one?
• Who lives in a mansion and who lives in the projects?
• Factor payments- the income people receive for supplying
factors of production- land, labor, capital and
entrepreneurship.
1. Examples
Who gets what, is the key difference between economic
systems today. Every society answers this questions
based on their social goals and values
Economic Goals of a Society
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Economic System- the method used by a society to
produce and distribute goods and services.
Three Economics Systems
1. Capitalism
2. Command
3. Mixed Economy
The 7 Goals of an Economy
1. Economic efficiency- Making the most of your
resources, an economy that can’t deliver goods isn’t
efficient.
2. Economic freedom- Freedom from government
intervention in the production and distribution of
goods and services
3. Economic security and predictability- Assurance
that goods and services will be available, payments
will be made on time, and a safety net will protect
individuals in times of economic disaster
The 7 Goals of an Economy
4. Safety Net- government programs that protect
people during bad economic times.
Examples5. Economic equity- How much should you get paid
for your services or lack of services.
6. Economic growth and innovation- Innovation
leads to economic growth, and economic growth
leads to a higher standard of living.
7. Value goals- Societies pursue additional goals, such
as environmental protection, universal medical care,
etc…
How does this represent
innovation and growth?
How does this represent
innovation and growth?
Market Economy (Capitalism)
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Definition- economy based on private ownership
were individuals control the production, distribution
and sale of goods.
Key Person: Adam Smith- “Wealth of Nations”
Why do markets exist?
1. Markets exist because none of us produces
all the goods and services we require to satisfy
our needs and wants.
How is money and goods exchanged in a Free Market?
1. In a free market economy, households and
business firms use markets to exchange money
and products. Households own the factors of
production and consume goods and services.
The Principles of Free Enterprise
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1. Profit Motive
• The drive for the
improvement of material
well-being.
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2. Open opportunity
• The ability for anyone to
compete in the
marketplace.
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3. Legal equality
• Equal rights to all.
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4. Private property rights
• The right to control your
possessions as you wish.
5. Free contract
• The right to decide what
agreements in which you
want to take part.
6. Voluntary exchange
• The right to decide what
and when you want to buy
and sell a product.
7. Competition
• The rivalry among sellers
to attract consumers.
Circular Flow Diagram of a Market Economy
Households pay
firms for goods
and services.
Product market
monetary flow
physical flow
Firms supply
households with
goods and
services.
Households
Households supply
firms with land, labor,
and capital.
Firms
Firms pay households
for land, labor, and
capital.
physical flow
monetary flow
Factor market
The Forces in a Free Market
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Self-interest- In every transaction, the buyer and
seller consider only their own personal gain. Selfinterest is the motivating force in the free market.
Competition- Producers in a free market struggle for
the dollars of consumers this is the regulating force
of the free market.
“Invisible hand”- The interaction of buyers and
sellers, motivated by self-interest and regulated by
competition, all happens without a central plan.
Market Economy- Strengths
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Economic Efficiency- as a self regulating system
Capitalism is very efficient
Economic Growth- Free market encourages
innovation which leads to growth
Economic Freedom- offers the most economic
freedom
Additional Goals- offers the largest variety of
goods and services
Market Economy- Weaknesses
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“Freedom” to starve, wealth is unevenly distributed
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NO equity or fairness
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NO motive to help the poor
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Greed for profit can result in dangerous goods being
provided
Poor Product safety
Command Economy
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Definition- the government owns both land and capital.
The government decides what to produce, how much to
produce, and how much to charge.
Key Person- Karl Marx: “Communist Manifesto”
Two types of Command Economies1. Socialism- is a social and political philosophy
based on the belief that democratic means should be
used to distribute wealth evenly throughout a society.
(Welfare Card)
2. Communism- is a political system characterized by
a centrally planned economy with all economic and
political power resting in the hands of the
government. (Hammer and Sickle)
Centrally Planned System
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Agriculture- the government created large
state-owned farms and collectives for most of
the country’s agricultural production.
Industry- planners favored heavy-industry
production (such as steel and machinery),
over the production of consumer goods.
Consumers- Consumer goods are scarce and
usually of poor quality
Centrally Planned
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Strength- Everyone knows what the plan is
and is focused on completing that plan.
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Weaknesses-
1. Unable to pull this off in a modern country
(countries are too big).
2. Inefficient and leads to shortages of needed
items- but a surplus of non-essential items.
(Underutilization)
3. Responds slowly to change
4. No worker incentives
Mixed Economies
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Definition- an economy that is a mixture of
both command and market economies. There
are no pure forms of either, most countries
have some government intervention.
Give Three Examples of Positive Government
Intervention
1.
2.
3.
Circular Flow Diagram of a Mixed Economy
Product market
monetary flow
physical flow
Households
expenditures
Government
expenditures
physical flow
monetary flow
Factor market
Firms