What Is An Economy? Chapter 13

What Is An Economy?
Chapter 13
What is an economy?
 Economy ---- the wealth and
resources of a country or
region, especially in terms of
the production and
consumption of goods and
 Economics ---- the study of
how individuals and
societies satisfy their
unlimited wants with limited
Wants vs. Needs
 Needs – food, clothing, shelter (necessary for survival)
 Wants – desires that can be satisfied by consuming a good or
Goods vs. Services
Factors of Production
 The resources people have for producing goods and services to
satisfy their wants & needs.
 Labor --- time, energy, knowledge, skills
 Land --- natural resources (soil, minerals, water, timber, fish &
wildlife, energy sources)
 Capital --- anything produced in an economy that is used to
produce other goods & services (tools, machines, buildings, etc.)
 Entrepreneurship --- combo of vision, skill, ingenuity, and
willingness to take risks that are needed to create and run new
Production to Consumption
 Production
 To produce the goods & services people want the factors of production (land,
labor, & capital) must be combined in a process
 That is why resources are called factors of production.
 Example --- farmers produce food by combining soil, water, & sunlight (land)
with seeds and machinery (capital). Also use their knowledge, skills, time, and
energy, as well as that of their workers (labor).
Production to Consumption
 Distribution
 The process by which goods and services are made available
to the people who want them.
 Ex. – truck that delivers milk to the grocery.
Production to Consumption
 Consumption
 Act of buying or using goods and services
Making Choices
 There are never enough resources to produce all the goods
and services people want.
 People in all societies must make choices about which of their
wants will be satisfied and which will not.
 These are economic choices.
 This process is what the economy is all about.
Benefits & Costs of Choices
 What benefit will you receive from each of your possible
 The major cost of any decisions is giving up the benefits you
would have received from the alternative.
 Opportunity cost – the highest valued benefit given up when a
choice is made
 Resources are always limited compared with the number and
variety of wants people have.
 Based on the relationship between wants and resources
available to satisfy them.
3 Basic Economic Questions
 Which goods and
services should be
produced, and in what
 How should these goods
and services be
 Who will get the goods
and services that are
What influences how a society answers
the basic economic questions?
 The society’s goals & values
 Ex. A society that wants to achieve
equality might develop a system for
sharing its products equally (even if it
means some people work harder than
others for the same reward)
 Ex. A society that wants to achieve
freedom might let citizens compete
freely to try to get the goods and
services they want (even if it means
some people get more than they need
while others get less)
Types of Economies
Traditional Economy
 Basic economic decisions are made according to long-
established patterns of behavior that are unlikely the change
 All members work together to support the society rather
than just their families
Command Economies (Planned)
 The government or a central authority owns or controls the
factors of production and makes the basic economic
Market Economies
 Capitalism ---- Private
individuals own the
factors of production
and are free to make
their own choices
about production,
distribution, &
 Free enterprise –
another name for
Mixed Economy
 Includes elements
of traditional,
command, and
market economies
 The most common
economic system
Examples of Types of Economics
 Traditional – Aborigines, Amazonian tribes, The Amish
 Command – China, Cuba, former Soviet Union
 Market – U.S.A.*, Japan*
 * Not a pure Market Economy because the government does
get involved
 Mixed – Iceland, Sweden, France, U.S.A., Japan
 https://www.youtube.com/watch?v=5xgwYRX19VU