Answering the
Three Economic
Questions
Economic System


The method used by a society to produce
and distribute goods and services
United States?


Sweden?


Mixed economy, capitalism or free enterprise
Centrally Planned or Socialism
Former Soviet Union?

Centrally Planned or Communism
Three Key Economic Questions
1.
What Goods and Services should be
produced?




Each society must decide what to produce to
satisfy needs/wants because of limited
resources
Food and Shelter
National defense and education
Public Health/welfare
Three Key Economic Questions
2.
How should these Good and Services be
produced?




Each society must decide what and how
many resources to use to produce products
Produce electricity through oil, nuclear or
solar power.
Large corporate farms or small family farms
Factors of production play an important role
Three Key Economic Questions
3.
Who Consumes these Goods and
Services?




Each society answers this by choosing how
to distribute income.
Compensation of supplying land, labor or
capital.
Why do doctors and lawyers get paid more
than firefighters or police officers?
Distribution of income is main difference
between each economic system.
Economic Goals and
Societal Values

Efficiency



Freedom



Making the most of the resources
Best way in least time
Free from government intervention
Make your own choices
Security and Predictability


Assurance of goods/services availability
Provide a safety net for disaster relief
Economic Goals and
Societal Values

Equity



Fair distribution of wealth
What should you be paid for a job?
Growth and Innovation


Leads to increasing wealth and higher
standard of living
Must provide new jobs/income for increasing
population
Traditional Economy







Habit, ritual or
customs
Little innovation
Boys follow father
Girls follow mother
Few safety nets
Resistant to change
Low standard of living
Market Economy



Decisions made by
individuals and based
on exchange or trade
No government
intervention
Also called:


Free markets
Pure Capitalism
Centrally-Planned Economy



Central government
decides how to
answer all economic
questions.
No free enterprise
allowed
Also called:

Command economy
Mixed (Modern) Economy


Combination of
Traditional, Market
and Centrally-Planned
economies.
Free Enterprise exists
but there is also
limited government
intervention