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What is an Economy?Chapter 3.1
Economic SystemsEconomy: the organized way a nation
provides for the needs and wants of its peopleA county’s resources determine economic
activities such as ManufacturingBuyingSellingTransportingInvesting
Resources Are all the things used in producing goods
and services Economists call these “Factors of
Production” 4 categories
1) Land (tangible)2) Capital (tangible)3) Labor (intangible)4) Entrepreneurship (intangible)
LandEverything contained in the earth or found in
the seasCoal, crude oil, lakes, trees, plants, soil etc.
CapitalMoney to start and
operate a businessAlso goods used in
production FactoriesOffice buildingsComputersToolsLumber (processed
raw materialsSteel
Includes infrastructurePhysical
development of countries
RoadsPortsSanitation facilitiesTelecommunications
LaborAll the people who work (full & part-time)Economies with well-educated and well-
trained labor have an advantage
EntrepreneurshipSkills of people who invest their time and
money to run a businessOrganize factors of production to create
goods and servicesEmployers of a population
ScarcityDifferent economies have different amounts
of resourcesLimited resourcesUnlimited wants and needsScarcity forces nations to make economic
choices
How Does an Economy Work?Three Basic Questions nations must ask:
1. Which goods and services should be produced?
2. How should goods and services be produced?3. For whom should the goods and services be
produced?
Answers define their economic system
Economic Systems: 3 Categories1. Traditional Economy2. Market Economy3. Command Economy
Traditional EconomyTraditions & rituals answer economic ?’sBased on cultural or religious practicesPassed from one generation to nextActivities assigned through tradition rather
than choice
Market EconomyIn pure market economy
there is no government involvement in economic decisions
Consumers decide what should be produced
Businesses decided how to produce goods and services
Command EconomyGov’t decides what,
when and how much will be produced and distributed
Gov’t controls factors of production
So what type of economy do we have?
Traditional?Market?
Command?
Mixed EconomiesNo economy is purely traditional, market, or
commandUS = mixed economy leaning toward market
economy (we have gov’t involvement)3 political philosophies have shaped world
economies: 1. Capitalism2. Socialism3. Communism
CapitalismPolitical & economic philosophy
characterized by marketplace competition and private ownership of businesses
Same as “free enterprise”Political foundation is usually Democracy
power in the hands of the peopleMultiple political partiesEx. US, Japan
CommunismIs a social, political, and economic philosophyGov’t is authoritarian- controls factors of
productionNo private ownership of property or capital“goods owned in common” theory where
gov’t is representing the community as a whole
Little or no economic freedomEx. Cuba, North Korea
SocialismOriginally referred to a system on its way to
communist ideal of classless societyToday most socialist countries are
democraciesMore gov’t involvement than Capitalist
nations – runs key industries, makes decisionsHave more social services Businesses & individuals pay higher taxesEx. Canada, Germany
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