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Answering Answering

the Three the Three

Economic Economic

QuestionsQuestions

Three Key Economic QuestionsThree Key Economic Questions

1. What goods and services should be produced?1. What goods and services should be produced?

2. How should these goods and services be produced?2. How should these goods and services be produced?

3. Who is going to consume these goods and services?3. Who is going to consume these goods and services?

Every society must answer these questions, but their answers may differ depending on their beliefs, values and traditions.

Common Economic GoalsCommon Economic Goals

Economic EfficiencyEconomic Efficiency Economic FreedomEconomic Freedom Economic Security & PredictabilityEconomic Security & Predictability Economic EquityEconomic Equity Economic Growth and InnovationEconomic Growth and Innovation Full EmploymentFull Employment

A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals:

Common Economic GoalsCommon Economic Goals

Economic EfficiencyEconomic Efficiency: : Efficiency is achieved when Efficiency is achieved when society is able to get the greatest society is able to get the greatest amount of satisfaction from amount of satisfaction from available resources. available resources. With efficiency, society cannot With efficiency, society cannot change the way resources are change the way resources are used in any way that would used in any way that would increase the total amount of increase the total amount of satisfaction obtained by society.satisfaction obtained by society.

A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals:

Common Economic GoalsCommon Economic Goals

Economic Equity Economic Equity : :

Equity is achieved when income and Equity is achieved when income and wealth are fairly distributed within a wealth are fairly distributed within a society. Almost everyone wants a fair society. Almost everyone wants a fair distribution. However, what constitutes distribution. However, what constitutes a fair and equitable distribution is a fair and equitable distribution is debatable. Some might contend that debatable. Some might contend that equity is achieved when everyone has equity is achieved when everyone has the same income and wealth. Others the same income and wealth. Others contend that equity results when contend that equity results when people receive income and wealth people receive income and wealth based on the value of their production. based on the value of their production.

A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals:

Common Economic GoalsCommon Economic Goals

Economic Freedom Economic Freedom The key ingredients of economic The key ingredients of economic freedom are personal choice, freedom are personal choice, voluntary exchange, freedom to voluntary exchange, freedom to compete in markets, and compete in markets, and protection of person and protection of person and property.property.

A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals:

Complementary GoalsComplementary Goals

Economic freedom and economic growth and Economic freedom and economic growth and innovation seek to move the economy in the same innovation seek to move the economy in the same direction. direction.

In a similar way, economic security and full In a similar way, economic security and full employment are complementary goals. employment are complementary goals.

Some economic goals work well together. For example,

Conflicting GoalsConflicting Goals

Some economic goals clash. Some economic goals clash.

Economic freedom and economic equity are not Economic freedom and economic equity are not compatible goals, nor are innovation and compatible goals, nor are innovation and predictability.predictability.

Societies must prioritize their goals and realize Societies must prioritize their goals and realize that achieving certain goals comes at the cost of that achieving certain goals comes at the cost of other goalsother goals

Economic SystemsEconomic Systems

We will start with 3 basic economic systems We will start with 3 basic economic systems before adding the mixed economy.before adding the mixed economy.

Traditional EconomiesTraditional Economies

Command EconomiesCommand Economies

Market EconomiesMarket Economies

Traditional EconomiesTraditional Economies

In a traditional economy, economic decisions are In a traditional economy, economic decisions are

based on custom and historical precedent.based on custom and historical precedent.

For example, in tribal cultures or in cultures For example, in tribal cultures or in cultures

characterized by a caste system, people in characterized by a caste system, people in

particular social strata or holding certain positions particular social strata or holding certain positions

often perform the same type of work as their often perform the same type of work as their

parents and grandparents, regardless of ability or parents and grandparents, regardless of ability or

potential.potential.

Command EconomiesCommand Economies

In a command economy, governmental planning In a command economy, governmental planning

groups make the basic economic decisions. groups make the basic economic decisions.

They determine such things as which goods and They determine such things as which goods and

services to produce, their prices, and wage rates. services to produce, their prices, and wage rates.

Cuba and North Korea are modern examples of Cuba and North Korea are modern examples of

command economies. command economies.

The Soviet Union was an historical example of a The Soviet Union was an historical example of a

command economy.command economy.

Market EconomiesMarket Economies

In a market economy, economic decisions are guided In a market economy, economic decisions are guided

by the changes in prices that occur as individual buyers by the changes in prices that occur as individual buyers

and sellers interact in the market place. and sellers interact in the market place.

Other names for the market system are free Other names for the market system are free

enterprise, capitalism, the price system and laissez-enterprise, capitalism, the price system and laissez-

faire. faire.

The economies of the United States, Singapore, and The economies of the United States, Singapore, and

Japan are identified as market economies since prices Japan are identified as market economies since prices

play a significant role in guiding economic activityplay a significant role in guiding economic activity ..

Mixed EconomiesMixed Economies

There are no pure command or market economies. To some degree, all modern economies exhibit characteristics of both systems and are, therefore, often referred to as mixed economies.

For example, in the United States the government makes many important economic decisions, even though the price system is still predominant.

Even in strict command economies, private individuals frequently engage in market activities, particularly in small towns and villages.

Traditional Traditional EconomyEconomy

Command Command EconomyEconomy

Market Market Economy Economy

Mixed Mixed EconomyEconomy

What will be What will be produced?produced?

What has What has always been always been produced.produced.

What the What the government government

orders.orders.

What the What the people will people will

buy.buy.

Certain Certain basic basic services are services are run by the run by the government government for the for the benefit of benefit of all. Most all. Most businesses businesses are privately are privately owned and owned and prices are prices are controlled controlled by the by the market.market.

How will it How will it be be produced?produced?

The way it The way it has always has always

been been produced.produced.

However the However the government government

says.says.

By the By the least least costly costly

method.method.

Who will Who will consume it?consume it?

Decided by Decided by tradition or tradition or

custom.custom.

Whoever the Whoever the government government

allows.allows.

Whoever Whoever is willing is willing to buy it.to buy it.

Comparing Economic SystemsComparing Economic Systems

Economic Systems: The Key PointEconomic Systems: The Key Point

The key point to remember is that every individual

and every society must contend with the problem of

scarcity.

Every society, regardless of its political structure,

must develop an economic system to determine how

to use its limited productive resources to answer the

three basic economic questions of what, how, and

for whom to produce.

Review QuestionsReview Questions

Identify the three key economic questions every Identify the three key economic questions every society must answer.society must answer.

Analyze the societal values that determine how a Analyze the societal values that determine how a country answers the three economic questions country answers the three economic questions

Explain the characteristics of traditional, Explain the characteristics of traditional, command, and market economies and describe command, and market economies and describe the societal values that influence them. the societal values that influence them.

Vocabulary to Know and UseVocabulary to Know and Use

economic systemeconomic system factor paymentsfactor payments patriotismpatriotism safety netsafety net standard of livingstandard of living traditional economytraditional economy market economymarket economy Economic freedomEconomic freedom Economic security & Economic security &

predictability predictability Economic efficiencyEconomic efficiency

centrally planned centrally planned economyeconomy

command economycommand economy mixed economymixed economy free enterprisefree enterprise capitalismcapitalism laissez-fairelaissez-faire price systemprice system Economic equityEconomic equity