Chapter
2
Making Decisions
About Production
No society has enough productive
resources available to produce
everything people want.
Every society must, therefore, make
choices. Rules and regulations
determine choices.
Introduction to Business, Economic Resources and Systems
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Chapter
2
Basic Economic Questions
A society makes economic choices by
answering three economic questions:
• What should be produced?
• How should it be produced?
• Who should share in what is
produced?
Introduction to Business, Economic Resources and Systems
Slide 2 of 60
Chapter
2
What Should Be Produced?
Deciding to use a resource for one
purpose means giving up the
opportunity to use it for something
else.
What is this called?
Introduction to Business, Economic Resources and Systems
Slide 3 of 60
Chapter
2
How Should It Be Produced?
When a society decides what to
produce, it must also address other
types of questions, such as what
methods will be used, how many
people will work on the production,
and what will be the quality of the
items produced?
Introduction to Business, Economic Resources and Systems
Slide 4 of 60
Chapter
2
Who Should Share in
What Is Produced?
This question focuses on the concept
that people can’t get everything that
they want because society doesn’t
have enough resources.
Introduction to Business, Economic Resources and Systems
Slide 5 of 60
Chapter
2
Who Should Share in
What Is Produced?
In most societies, people can have as
many goods and services as they can
afford to buy based on the income they
receive.
Introduction to Business, Economic Resources and Systems
Slide 6 of 60
Capitalism,
Socialism, and
Communism
Capitalism
►Capitalism
– an economic
system based on private
ownership and on the
investment of money in
business ventures in order to
make a profit.
Capitalism
►Adam
Smith
 University professor
in Scotland
 Supported Capitalism
 Wrote “The Wealth of Nations”
Capitalism
►Ideas:
 Businesses compete with
each other for the
consumer’s money.
 Each business tries to
provide goods and services
that are better and less
expensive than their
competition.
Capitalism
 A market economy aims to
produce the best goods at
the lowest prices.
►Supply
and Demand
Capitalism
 Government should not
interfere in the economy.
►Laissez
faire
Capitalism
 Laissez faire – letting owners
of industry and business set
working conditions without
interference
►No
government regulations,
such as minimum wage laws
Market Economy (Free Enterprise)

Also called a Free Market

Economy or Free
Enterprise Economy


Businesses and
consumers decide what
they will produce and
purchase and in what
quantities
Decisions are made
according to law of
supply & demand



Supply and demand of
goods and services
determine what is
produced and the price
that will be charged.
Advantage—competition
to have the best products
and services
Disadvantage—huge rift
between wealthy and
poor
Note: a true market
economy does not exist.
Chapter
2
Command Economy
In a command economy a central
authority makes the key economic
decisions.
A command economy is also called a
planned or managed economy.
Introduction to Business, Economic Resources and Systems
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Chapter
2
Command Economy
There are two types of command
economies.
In a strong command economy, such
as communism, the state makes all
the economic decisions.
Introduction to Business, Economic Resources and Systems
Slide 16 of 60
Chapter
2
Command Economy
In a moderate command economy,
also called socialism, there is some
form of private enterprise.
The primary advantage of a command
economy is that it guarantees
everyone an equal standard of living.
Introduction to Business, Economic Resources and Systems
Slide 17 of 60
Chapter
2
Command Economy
There are some disadvantages to a
command economy.
Since the state provides all goods and
services in a strong command
economy, there is little choice of what
to buy.
Introduction to Business, Economic Resources and Systems
Slide 18 of 60
Chapter
2
Command Economy
Another disadvantage to the command
economy is that there is no incentive
for entrepreneurship when you can’t
run your own business.
Introduction to Business, Economic Resources and Systems
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Command Economy


The government (or
central authority)
determines what, how,
and for whom goods and
services are produced.
Two types:


Strong Command – where
government makes all
decisions (communism –
China, Cuba)
Moderate Command –
where some form of
private enterprise exists
but the state owns major
resources (socialism –
France and Sweden)

Advantages




Disadvantages




Guarantees equal
standard of living for
everyone
Less crime and poverty
Needs are provided for
through the government
Minimal choices
Fewer choices of items
No incentive to produce
better product or engage
in entrepreneurship
Also known as a Planned
or Managed Economy
“From each according to his/her ability,
to each according to his/her need."
Communism
“The worker of the world has
nothing to lose, but their chains,
workers of the world unite.” - Marx
“From each according to his/her
ability, to each according to
his/her work."
Socialism
Socialism
►Government
actively
regulates the economy
 Controls major industries and
resources.
Communism
►Communism
– an economic
system in which all means of
production are owned by the
people, private property does
not exist, and all goods and
services are shared equally.
Communism
►Karl
Marx
 German journalist
 Radical Socialist
 Wrote “The Communist
Manifesto”
Communism
►Friedrich
Engels
 Son of a wealthy German
textile entrepreneur
 Radical Socialist
 Co-Wrote “The Communist
Manifesto” and “Das
Capital”
Communism
►In
many ways, Communism
was a reaction to the
Industrial Revolution and
Capitalism
Communism
►The
Industrial Revolution
intensified class struggle
(rich vs. poor)
 “Haves” take advantage of
“Have-Nots” (proletariat)
Communism
 Workers are exploited by
employers
 The labor of workers profits
employers
Communism
►Marx
and Engels called for
workers of the world to unite
and overthrow the rule of the
rich.
 Wealth would be redistributed
 Classes and private property
would cease to exist