Economics

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Economics

• Chapter 2

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The Three Economic Questions

• Every society must answer three questions
• What goods and services should be produced?
• How should these goods and services be produced?
• Who consumes these goods and services?

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What are Societys Economic Goals?
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Economic efficiency

• Making the most of resources

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Economic freedom

• Freedom from government intervention in the
  production and distribution of goods and services

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Economic equity

• Fair distribution of wealth

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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

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Economic growth and innovation

• Innovation leads to economic growth, and economic
  growth leads to a higher standard of living.

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Other goals

• Societies pursue additional goals, such as
  environmental protection.

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Four Economic Systems
An economic system is the method used by a
society to produce and distribute goods and
services.
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• Traditional economies rely on habit, custom, or
  ritual to decide what to produce, how to produce
  it, and to whom to distribute it.

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In a market economy economic decisions are made
by individuals and are based on exchange, or
trade.
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In a centrally planned economy the central
government makes all decisions about the
production and consumption of goods and services.
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Mixed economies are systems that combine
tradition and the free market with limited
government intervention.
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The Free Market

• Why Do Markets Exist?

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Markets exist because none of us produces all
the goods and services we require to satisfy our
needs and wants.
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A market is an arrangement that allows buyers and
sellers to exchange goods and services.
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Specialization is the concentration of the
productive efforts of individuals and firms on a
limited number of activities.
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The Free Market Economy

• In a free market economy, households and business
  firms use markets to exchange money and products.
  Households own the factors of production and
  consume goods and services.

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The Markets Self-Regulating Nature

• In every transaction, the buyer and seller
  consider only their self-interest, or their own
  personal gain. Self-interest is the motivating
  force in the free market.

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• Producers in a free market struggle for the
  dollars of consumers. This is known as
  competition, and is the regulating force of the
  free market.

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• The interaction of buyers and sellers, motivated
  by self-interest and regulated by competition,
  all happens without a central plan. This
  phenomenon is called the invisible hand of the
  marketplace.

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Advantages of the Free Market
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• Economic Efficiency
• As a self-regulating system, a free market
  economy is efficient.

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Economic GrowthBecause competition encourages
innovation, free markets encourage growth.
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Economic FreedomFree market economies have the
highest degree of economic freedom of any
economic system.
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Additional GoalsFree markets offer a wider
variety of goods and services than any other
economic system.
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Organization of Centrally Planned Economies
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In a centrally planned economy, the government
owns both land and capital. The government
decides what to produce, how much to produce,
and how much to charge.
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Karl Marx
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Socialism is a social and political philosophy
based on the belief that democratic means should
be used to distribute wealth evenly throughout a
society.
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Communism is a political system characterized by
a centrally planned economy with all economic and
political power resting in the hands of the
government.
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Problems of a Centrally Planned Economy

• Centrally planned economies face problems of
  poor-quality goods, shortages, and diminishing
  production.

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The Rise of Mixed Economies
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Governments Role in a Mixed Economy

• The government purchases land, labor, and capital
  from households in the factor market, and
• Purchases goods and services in the product
  market.

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Comparing Mixed Economies

• An economic system that permits the conduct of
  business with minimal government intervention is
  called free enterprise. The degree of government
  involvement in the economy varies among nations.

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Things to think about
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Why arent all people paid the same amount in
factor payments for the resources they provide?
Provide an example of two unequal factor payments.
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You and your friends decide to earn money by
washing cars. How are the three economic
questions answered in this market?
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How does specialization make us more efficient?
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What is the connection between incentives and
consumer sovereignty in a free market economy?
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Why is economic equity difficult to achieve in a
free market economy?
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Provide at least 3 real world examples to
illustrate the circular flow model of a market
economy.
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How do socialism and communism differ?
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Why do centrally planned economies have
difficulty meeting consumer needs?
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Why is it good for the US to send foreign aid to
other countries?
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What benefits might citizens of a centrally
planned economy derive from a move toward a
market-based system?
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Within this classroom mini-economy, how are the 3
economic questions answered?
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How would your life change if the US transitioned
to a pure free market?
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How would your life change if the US transitioned
to a pure centrally planned system?
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Pretend you are opening a new ice cream shop in
Sugar Land. What resources would you need from
the factor market? What would you offer in the
product market? How would the government affect
your business?