Chapter 3

Section 3.1

ObjectivesDefine the concept of an economyList the factors of productionExplain the concept of scarcityDiscuss how traditional, market, command,

and mixed economies answer the three basic economic questions

Cite examples of various economic systems

Key TermsEconomyResourcesFactors of

productionInfrastructureEntrepreneurship

ScarcityTraditional economyMarket economyCommand economy

Economic SystemsEconomy (economic system)

the organized way a nation provides for the needs and wants of its people.

A nation chooses how to use its resources to produce and distribute goods and services.A country’s resources determine economic

activities, such as manufacturing, buying, selling, transporting, and investing.

Economic SystemsResources

All the things used in producing goods and services.

Economists use the term factors of production when they talk about resources 4 categories

Land (tangible) Labor (intangible) Capital (tangible) Entrepreneurship (intangible)

Economic SystemsResources

Land Includes everything contained in the earth or found in

the seas.Labor

Refers to all the people who work Includes all part-time and full-time workers, managers,

and professional people

Capital Money to start and operate a business

Entrepreneurship Skills of people who are willing to invest their time

and money to run a business.

ScarcityDifferent economies have different amounts

of resourcesScarcity

The difference between wants and needs and available resources is called scarcity

Forces nations to make economic choices

How Does An Economy Work?Nations must answer three basic

questions when deciding how to use their limited resources

1. Which goods and services should be produced?

2. How should the goods and services be produced?

3. For whom should the goods and services be produced?

The way nations answer these questions defines their economic systems

How Does An Economy Work?Based on the way nations answer the

basic questions they are classified into three broad categoriesTraditionalMarketCommand

Traditional EconomiesTraditional Economy

Traditions and rituals answer the basic questions of what, how, and for whom.

Often based on cultural or religious practices and ideals have been passed from one generation to the next.

Activities are assigned through tradition rather than by choice

Traditional Economies1. What?

In a traditional economy there is little choice as to what to produce. If people belong to a community of farmers, they farm for generations.

2. How? The potter whose family has made clay pots for

generations will continue to follow the practices of his or her ancestors

3. For whom? Tradition regulates who buys and sells and

where and how the exchange takes place

Market EconomiesMarket Economy

No government involvement in economic decisions

Individuals and companies own the means of production

Businesses compete for consumers

Market EconomiesThe government lets the market answer the three basic economic questions

1. What? Consumers decide what should be produced in a

market economy through the purchases that they make in the marketplace

2. How? Businesses in a market economy decide how to

produce goods and services Must be competitive to produce quality products at

lower prices

3. For whom? The people who have more money are able to buy

more goods and services

Command EconomiesCommand Economy

A system in which a country’s government makes economic decisions and decides what, when, and how much will be produced and distributed.

Command EconomiesThe government is responsible for

answering the three basic economic questions

1. What? One person or a group of government officials decides

what products are needed based on what they believe is important

2. How? Government decides how goods and services will be

produced Controls all employment and benefits

3. For whom? The government decides who will receive what is

produced.

Mixed EconomiesNo economy is purely a traditional, market,

or command economyThe USA is considered a mixed economy with

leanings toward a market economyThere is some government involvement

through the laws and regulations that businesses must follow.

All economies in the world today are mixedDepends on how much a government interferes

with the free market

The three political philosophies that have shaped world economies are:Capitalism,SocialismCommunism

CapitalismCapitalism

A political and economic philosophy characterized by marketplace competition and private ownership of businesses.

Same as free enterpriseGovernment is concerned about its people and

cares for those who cannot care for themselves.

Political Foundations of CapitalismDemocracy

Believe that political power should be in the hands of the people

CommunismCommunism

Social, political, and economic philosophy in which the government, usually authoritarian, controls the factors of production.

There is no private ownership of property or capital.Theory is that societal classes are eliminated

Characteristics of a Communist CountryAll people who are able to work are assigned jobsThe government decides the type of schooling people will

receive also tells them where to live.Low prices for food and housing subsidiesMedical care is freeLittle or no economic freedomNo financial incentive for people to increase their

productivity

SocialismDiffer from capitalist nations in the increased

amount of government involvement in the economy

Main goal is to meet basic needs for all and to provide employment for many.

Characteristics of Socialist CountriesTend to have more social services to ensure a

certain standard of living for everyoneMedical care and education is free or low costSystem for pensions and elderly careBusinesses and individuals pay much higher taxes

than those in capitalist countries

SocialismThe Role of Government in Socialist Countries

Government runs key industries and make all economic decisions

Examples Canada Germany Sweden

Economies in TransitionMost Eastern European countries that were

once communist satellites have moved toward global market economies and more democratic forms of government

State owned industries have been privatized in many of these nations

PrivatizationThe process of governments selling

government-owned businesses to private individuals or businesses

Economies in TransitionA Move Toward Privatization

Socialist countries are selling some of their state-run businesses to help balance their budgets Great Britain sold its national phone company,

national steel company, national sugar company, and several others.

Great Britain also privatized British Airways and it has become Europe’s number-one airline

Economies in TransitionDeveloping Economies

Developing economies are mostly poor countries with little industrialization that are trying to become more prosperous and develop their infrastructure.

Success depends on: Improving education levels of their labor force Directing and using foreign investment efficiently

Section 3.1 Questions1. Explain how the infrastructure of a country

can be related to the factors of production.2. What three broad categories do economists

use to classify all types of economic systems?3. In which economic system does the

government let the market answer the three basic economic questions?

4. In a country with a population of 290,342,554, how many people would be considered below the poverty line if the percentage in that category was 12.7 percent?