Section 1 Answering the Three Economics Questions pp. 23-27 Chapter 3 Section 1 Answering the Three Economics Questions pp. 23-27

The Three Economic Questions What do we produce? How do we produce it? Who consumes what is produced?

Economic System The method used by a society to produce and distribute goods and services

Factor Payments The income people receive for supplying factors of production (land, labor, and capital)

patriotism The love of one’s country; the passion that inspires a person to serve his or her country

Safety Net Government programs that protect people experiencing unfavorable economic conditions

Standard of Living Level of economic prosperity

Traditional Economy Economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services

Market Economy Economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

Centrally-Planned Economy Economic system in which the central government makes all decisions on the production and consumption of goods and services Also a “Command Economy”

Mixed Economy Market-based economic system with limited government involvement

Why are not all people paid the same amount in factor payments for the resources they provide? Factor payments differ because societies place different values on different resources and products.

Two examples of unequal factor payments . . . A doctor’s wages vs. landscapers wages

Why do governments provide safety nets for their citizens? Governments provide safety nets to fulfill the goal of economic security and predictability.

Centrally-Planned (Command) Economy Type of Economy Characteristics (How is it different from the rest?) Example (What country or region has this type of economy?) Societal values of people performing in this economy Free Market (List a country with a mixed economy which is mostly free market) Traditional Economy Centrally-Planned (Command) Economy Mixed Economy

Ch 2, Sec. 2 The Free Market Explain why markets exist Analyze a circular flow model of free market economy Understand the self-regulating nature of the marketplace Identify the advantages of a free market economy

market An arrangement that allows buyers and sellers to exchange things

specialization The concentration of the productive efforts of individuals and firms on a limited number of activities Specialization makes us more efficient. It is much easier to learn one task very well than to learn them all.

household A person or group of people living in the same residence

firm An organization that uses resources to produce a product, which it then sells

Factor Market Market in which firms purchase the factors of production from households

profit The financial gain made in a transaction

Product Market The market in which households purchase the goods and services that firms produce

Self-Interest One’s own personal gain

incentive An expectation that encourages people to behave a certain way

competition The struggle among producers for the dollars of consumers

Invisible Hand A term economists use to describe the self-regulating nature of the marketplace

Consumer sovereignty The power of consumers to decide what gets produced

Why is economic equity difficult to achieve in a free market economy? Economic equity is difficult to achieve in a free market economy because not every person functions in the market with the same skills and abilities, and therefore differences in compensation arise.

You and your friends decided to wash cars to make some money. Describe how the three key economic questions arae answered with this enterprise. What good or service is produced? How is it produced? Who consumes the good or service?

Adam Smith Scottish economist Lived 1723 – 1790 Wrote “Wealth of Nations” Published 1776

What forces make up the “invisible hand”? Self-Interest and Competition Smith meant that the combination of consumers’ self-interest and competition among firms would naturally lead to an economy in which consumers can buy products they want at reasonable prices.

What is laissez faire? “let them do as they please” Government should not interfere with the economy Individuals would be free to pursue their own interests if a market is to run smoothly

Key Terms/Questions, Ch 2, Section 3 Centrally-Planned (Command) Economies

Socialism A social and political philosophy based on the belief that democratic means should be used to evenly distribute wealth throughout a society

Authoritarian Requiring strict obedience to an authority, such as a dictator

collective Large farm leases from the state to groups of peasant farmers

Heavy Industry Industry that requires a large capital investment and that produces items used in other industries

How are socialism and communism different? In socialist countries the government often owns major industries. Socialism has been achieved peacefully through democracy. Communist governments are authoritarian

Why did Soviet collectives offer little incentive to farmers ? The government paid farmers a set wages and told them what to produce, thus providing very little incentive to produce more or to produce goods more efficiently.

Why do centrally-planned economies have difficulty meeting consumer needs? Centrally-planned economies eliminate competition, giving businesses no incentive to produce consumer goods of high quality. Also, the large bureaucracy needed in this type of economy is not flexible enough to respond to consumer demands.

What problems has Russia experienced in switching from a centrally-planned to a free market economy? Crime, corruption, financial difficulties, and food shortages

Why would Western nations be willing to make loans to Russia? Problems may arise from a nation armed with thousands of nuclear weapons being thrown into chaos. Also, it is economically desirable for Russia to be economically sound and able to buy Western goods and to be able to produce goods for sale.