ch. 2 - economic systems three fundamental economic questions 1. what to produce? guns vs. butter...
TRANSCRIPT
Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
1. What to Produce? Guns vs. Butter
The problem of scarcity imposes a restriction on the ability to produce everything we want during a given period, so the choice to produce “more” of a good requires producing “less” of another good.
Ch. 2 - ECONOMIC SYSTEMS
2. How to Produce?
Three Fundamental Economic Questions
Vs.
How do we mix technology and scarce resources in order to produce goods and services?
Ch. 2 - ECONOMIC SYSTEMS
3. For Whom to Produce?
Three Fundamental Economic Questions
Society must have a method to decide who will be “rich” and who will be “poor”.
Ch. 2 - ECONOMIC SYSTEMS
Economic Efficiency
Making the most of resources
Economic Freedom
Freedom from government intervention in the production of goods and services
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
Economic EquityFair distribution of wealth
Economic Growth and Innovation
Innovation leads to economic growth, and economic growth leads to a higher standard of living
Economic Efficiency
Economic Freedom
Economic Equity
Economic Security and Predictability
Economic Growth and Innovation
5 Economic Goals
Ch. 2 - ECONOMIC SYSTEMS
Relies on habit, or ritual to decide how to answer the 3 economic questions.
• Revolves around the family
• Work divided along gender lines
• Agricultural and hunting practices usually dominate the economy
• Slow to adopt new technology or ideas
Traditional Economies
Ch. 2 - ECONOMIC SYSTEMS
Centrally Planned (Command) Economies
The government owns both the land and capital and decides on behalf of the people how to answer the 3 economic questions
• Government controls all aspects of production
• Socialism – government owns some FOP
• Karl Marx – The Communist Manifesto
Ch. 2 - ECONOMIC SYSTEMS
Free Market Economies
Individuals and privately owned businesses own the factors of production and decide how to answer the 3 economic questions
• Specialization of tasks makes the economy more efficient
• Everyone acts in their own self-interest
• There is no government intervention
• Laissez Faire
Adam Smith’s Invisible Hand
Self-interest and competition work together to regulate the marketplace
Ch. 2 - ECONOMIC SYSTEMS
Businesses
Households
F.O.PL.L.C
Supply Goods and
services
Expenditures Demand
$ $ $
$$
Factor Payments
wages, rent, interest, profits
$
$
$
$
$
Product Market
Factor Market
Circular Flow of Money
Ch. 2 - ECONOMIC SYSTEMS
Mixed Economies
The people answer the 3 economic questions with some intervention from the government to account for market failures
• Economic decisions are made by individuals with government oversight
• Government is a key component of economic activity
• All nations exist in the “mixed economy continuum”
N. KoreaIran
Cuba
United Kingdom
France
Peru Canada
United States
SingaporeRussia
Centrally Planned Free Market