Unit 1 Economic ConceptsChapter 2.1

EconomicsMr. Biggs

Answering the Three Economic Questions

Economic system - A method used by a society to produce and distribute goods and services.

Three Key Economic QuestionsBecause economic resources are limited, every society must answer three key economic questions:

1) What Goods and Services Should Be Produced?Remember the guns-and-butter trade-off

2) How Should These Services Be Produced? By various combinations of the factors of production.

3) Who Consumes These Goods and Services?This is determined by the distribution of income.Factor payments - The income people receive for supplying the factors of production (land, labor, capital or entrepreneurship).

Economic Goals and Societal ValuesSocieties answer the three economic questions based on the priorities they attach to various economic goals.

Economic EfficiencySocieties maximize what they can get from the available resources. An economy cannot deliver goods if it is not efficient.

Economic FreedomEconomic freedom is the degree to which individuals make economic choices, rather than the government making decisions for them.Patriotism - The love of one’s country.Most Americans are patriotic about their economic freedoms.

Economic Security and PredictabilityGovernment should provide a safety net.Safety net - Government programs that protect people experiencing unfavorable economic conditions.

Economic EquityWhat is a fair share? Should everyone earn and equal income? Should teachers make more than prison guards?

Economic Growth and InnovationEconomies must grow to improve a country’s standard of living.Standard of living - Level of economic prosperity.

Additional Goals Environmental protection, universal health care, and full employment.

Economies and ValuesFour different economic systems have developed to address the three economic questions.

Traditional EconomiesRelies on habit, custom or ritual (Amish).

Market Economy Production and consumption decisions are based on voluntary exchange in markets (Hong Kong).

Command EconomyCentrally planned economy or command economy - The central government alone makes all the decisions on production and consumption of goods (N. Korea).

Mixed EconomyMost modern economies are mixed economies which is a combination of market and command.

The End