Answering the Three Economic Questions Chapter 2 Section 1
Answering the Three Economic Questions The Free Market Centrally Planned and Modern Economies 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? Economic Goals Societies answer the three economic questions based on their values: Economic Efficiency= (Making the most of resources) Economic Freedom= (Free from government intervention) Economic Security and Predictability= (Availability, payment, and safety nets) Economic Equality= (Fair distribution of wealth)
Economic Growth and Innovation= (Leads to a higher standard of living) Hand Tools + 1 acre of land + 56 worker-hours = capital
15 bushels of wheat Identify the opportunity costs of hand tool farming? Modern Mechanical Equipment + 1 acre of land +
2.9 worker-hours = capital 40 bushels of wheat Identify the opportunity costs of modern mechanical equipment farming? Which economic goal could help them recover from a storm?
Economic Efficiency Economic Freedom Economic Equality and Predictability Economic Equity Economic Growth and Innovation Other goals Four Economic Systems An economic system is the method used by a society to produce and distribute goods and services.
Traditional Economies Centrally Planned Economy Market Economy Mixed Economies Traditional Economies They rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.
Traditional Economies Existed in earlier ages and in some industrialized nations today Goods are produced and distributed in the same ways that have been used for centuries Caste System in India Centrally Planned Economy The central government
makes all decisions about the production and consumption of goods and services. The Former Soviet Union Market Economy Economic decisions are made by individuals and are based on exchange, or trade. Mixed Economies
Are systems that combine tradition and the free market with limited government intervention. What is a Market? A market is an arrangement that allows buyers and sellers to exchange goods and services.
Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities. Anne the Cook Cook Full Time Cook and Wait in Customers
Meals Cooked per Day 20 4 Customers Waited on per Day 0 4
Wait Full Time Cook and Wait on Customers Meals Cooked per Day 0 4 Customers Waited on
per Day 20 4 Sam the Waiter According to the table, if Anne and Sam each worked together, how many meals per day would be served by each of them? 2 20 5
4 Production Possibilities for Two Countries Production Possibilities for Two Countries Will these two countries gain from trade if 100 units of malaria medicine are traded for 200 cotton shirts? To find out: 1. Calculate the opportunity costs of production for each
country 2. Determine the comparative advantage for each country 3. Determine if the terms of trade are mutually beneficial Production Possibilities for Two Countries Bangladesh
United States Cotton Shirts (C) 750C = 250M 1C = 1/3M 1000C =1000M 1C = 1M Malaria
Medicine (M) 250M = 750C 1M = 3C 1000M =1000C 1M = 1C Why Do Markets Exist? Markets exist because none of us produces all the goods and services we require to satisfy our needs and wants.
The Free Market Economy Households and business firms use markets to exchange money and products. Households own the factors of production (land, Labor, and capital) Households also consume the goods and services.
Circular Flow Diagram of a Market Economy Product market Households pay firms for goods and services. monetary flow physical flow Firms supply households with goods and services.
Households Firms Households supply firms with land, labor, and capital. physical flow monetary flow Factor market
Firms pay households for land, labor, and capital. What is the exchange in the factor market? In the product market? Circular Flow Diagram of a Market Economy Households pay firms for goods and services. Product market
monetary flow physical flow Firms supply households with goods and services. Households Firms Households supply firms with land,
labor, and capital. physical flow monetary flow Factor market Firms pay households for land, labor, and capital.
How does the Free Market Work? In every transaction, the buyer and seller consider only their selfinterest, or their own personal gain. Self-interest is the motivating force in the free market. Self-Interest Creates Competition 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. Competition Creates the Invisible Hand The interaction of buyers and sellers, motivated by selfinterest and regulated by competition, all happens without a central plan. This phenomenon is
called the invisible hand of the marketplace. What Makes the Free Market Great? The Free Market gives buyers and seller to interact with little or no government interaction This happens through: Economic Efficiency= (Self regulation) Economic Growth= (Competition encourages growth) Economic Freedom= (Do as you please)
What is a Centrally Planned Economy? In a centrally planned economy: The government owns both land and capital. The government decides the three economic questions: What to produce How much to produce But, How much to charge (This one is different) Centrally Planned Economies are classified as Socialist and Communist
How would you describe production in this Chinese factory? Socialism Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Real equality can only be achieved when political equality is combined with
economic equality. Economic equality only happens when the public controls the centers for economic power. Real equality can only be achieved when political equality is combined with economic equality. Economic equality only happens when the public controls the centers for economic power.
These nations may claim to be democratic but need a high degree of centrally planning to work. Communism Communism is a political system characterized by a centrally planned economy with all
economic and political power resting in the hands of the government. In theory Communism works After a violent revolution to create a communist state: Ruled by a single leader Try to build a national
power by using the best of the factors of production Communism promises equality for everyone The Former Soviet Union The former Soviet Union used three factors to create a national powerhouse: Agriculture Industry
Consumers Soviet Agriculture In the Soviet Union: The government created large stateowned farms and collectives for most of the countrys agricultural production.
How would you describe the farming techniques in this photo of a Soviet Collective? Soviet Industry Soviet planners favored heavy-industry production (such as steel and machinery), over the production of consumer goods. Soviet Consumers
Consumer goods in the Soviet Union were scarce and usually of poor quality. Problems of a Centrally Planned Economy Centrally planned economies face problems of poorquality goods, shortages, and diminishing
production. A lack of competition due do equality causes this The Problem with Market Economies Laissez faire is the doctrine that government generally should not interfere in the marketplace. The economy runs itself
Market economies, with all their advantages, have certain drawbacks. They will need help to keep stability The Mixed Economy How do government actions affect the circular flow model in a mixed economy?
The Mixed Economy In a mixed economy: The government purchases land, labor, and capital from households in the factor market Purchases goods and services in the product market. Comparing Mixed Economies
Economic systems are classified by the amount of government involvement. Centrally Planned has lots of government intervention Free Market (Free Enterprise) has very little if any government The degree of government involvement in the economy varies among nations. Label by Economy Cuba United States Canada
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