The Basics of Economics

Economic systems are the ways by which societies make economic decisions. All systems must answer these questions:◦ What to produce?◦ How to produce?◦ For whom to produce?

There are four types of economic systems.

◦ traditional, market, ◦ command, & mixed

depends on history, traditions, customs of the people in that region.

Economic decisions repeat those made in earlier times. ◦ Decisions are made the way

they always have been.◦ Customs are passed on from

one generation to the next.◦ Land is commonly owned.

barter – to trade one good or service for another

examples:◦ villages of India

(remote areas)◦ remote African tribes

Economic decisions are made by the government.

Economic decisions:◦ What to produce?◦ How to produce?◦ For whom to

produce?

examples:◦ Cuba & North

Korea◦ former Soviet

Union◦ China (was

command - now has a mixed system)

Economic decisions are made by individuals.

Consumers decide what is produced by what they purchase.

Producers determine how to produce goods and services.◦ They want the most economical

way (have to compete with other producers), & ONLY the most efficient will stay in business.

income – depends upon the productive resources that a person has to sell

prices – market prices are signals that affect production and consumption

Mixed is a blend of command and market systems.

Most systems are a mixture of systems (not all of one or the other).

Producers determine production, but the government sets safety standards for products.◦ United States – OSHA,

FDA, safety laws that regulate trade

free enterprise – found with market/mixed economies

Economic Systems

PureMarketPure

Command

• How many basic types of economic systems are there?

• Name the economic systems.

• Which economic system do most textbooks say is the most common throughout the world?

Productive Resourcesa.k.a. Factors of

Production

availability of these impacts the economic decisions

four major categories: ◦natural ◦human◦capital (goods and

human)◦entrepreneurship

includes the sun, wind, water, oceans, rivers, gifts of nature, and mineral resources available in an area

Labor, people with talent, knowledge, and skills

Give me an example of a profession and the type of skills it would require…

Capital goods are the tools.◦ These are things that

have been produced by past efforts of people that are used in production of goods and services.

◦ Examples include: tools, equipment, buildings, machinery, and factories.

This is not money!◦ Money is NOT a

resource; money is a means or medium of exchange.

◦ Money is not worth anything by itself. Its value is for what we can exchange the money.

ability and willingness to see an opportunity to make a profit by making and selling a good or service - the willing- ness to risk capital

entrepreneur – person who takes a risk to produce a good or service

investor – person who provides capital to an entrepreneur

middleman – a trader who buys goods from the producer and, in turn, sells the goods to another seller or sells directly to the consumer for profit (involves mark up in price to consumer at each exchange)