3 Objectives Define the concept of an economy List the factors of productionExplain the concept of scarcityDiscuss how traditional, market, command, and mixed economies answer the three basic economic questionsCite examples of various economic systems
4 Key Terms Economy Resources Factors of production Infrastructure EntrepreneurshipScarcityTraditional economyMarket economyCommand economy
5 Economic Systems Economy (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.
6 Economic Systems Resources All the things used in producing goods and services.Economists use the term factors of production when they talk about resources4 categoriesLand (tangible)Labor (intangible)Capital (tangible)Entrepreneurship (intangible)
7 Economic Systems Resources Land Labor Capital Entrepreneurship Includes everything contained in the earth or found in the seas.LaborRefers to all the people who workIncludes all part-time and full-time workers, managers, and professional peopleCapitalMoney to start and operate a businessEntrepreneurshipSkills of people who are willing to invest their time and money to run a business.
8 Scarcity Different economies have different amounts of resources The difference between wants and needs and available resources is called scarcityForces nations to make economic choices
9 How Does An Economy Work? Nations must answer three basic questions when deciding how to use their limited resourcesWhich goods and services should be produced?How should the goods and services be produced?For whom should the goods and services be produced?The way nations answer these questions defines their economic systems
10 How Does An Economy Work? Based on the way nations answer the basic questions they are classified into three broad categoriesTraditionalMarketCommand
11 Traditional Economies Traditional EconomyTraditions 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
12 Traditional Economies 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.How?The potter whose family has made clay pots for generations will continue to follow the practices of his or her ancestorsFor whom?Tradition regulates who buys and sells and where and how the exchange takes place
13 Market Economies Market Economy No government involvement in economic decisionsIndividuals and companies own the means of productionBusinesses compete for consumers
14 Market EconomiesThe government lets the market answer the three basic economic questionsWhat?Consumers decide what should be produced in a market economy through the purchases that they make in the marketplaceHow?Businesses in a market economy decide how to produce goods and servicesMust be competitive to produce quality products at lower pricesFor whom?The people who have more money are able to buy more goods and services
15 Command Economies Command Economy A system in which a country’s government makes economic decisions and decides what, when, and how much will be produced and distributed.
16 Command EconomiesThe government is responsible for answering the three basic economic questionsWhat?One person or a group of government officials decides what products are needed based on what they believe is importantHow?Government decides how goods and services will be producedControls all employment and benefitsFor whom?The government decides who will receive what is produced.
17 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
18 The three political philosophies that have shaped world economies are: Capitalism,SocialismCommunism
19 Capitalism Capitalism Political Foundations of Capitalism 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 CapitalismDemocracyBelieve that political power should be in the hands of the people
20 Communism Communism Characteristics of a Communist Country 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 eliminatedCharacteristics 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
21 SocialismDiffer from capitalist nations in the increased amount of government involvement in the economyMain 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
22 Socialism The Role of Government in Socialist Countries Government runs key industries and make all economic decisionsExamplesCanadaGermanySweden
23 Economies in Transition Most Eastern European countries that were once communist satellites have moved toward global market economies and more democratic forms of governmentState owned industries have been privatized in many of these nationsPrivatizationThe process of governments selling government-owned businesses to private individuals or businesses
24 Economies in Transition A Move Toward PrivatizationSocialist countries are selling some of their state-run businesses to help balance their budgetsGreat 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
25 Economies in Transition Developing EconomiesDeveloping 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 forceDirecting and using foreign investment efficiently
26 Section 3.1 QuestionsExplain how the infrastructure of a country can be related to the factors of production.What three broad categories do economists use to classify all types of economic systems?In which economic system does the government let the market answer the three basic economic questions?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?