Answering the Economic Questions Economic system  the method used The economic system chosen by a society Three questions to answer: – What goods will be produced? – How will the goods be produced – Who consumes these goods and services?

What goods will be produced? And how will they be produced? Question 1: – No country can produce – Each production decision that a society Question 2: – Societies have to figure out a way to combine the factors of production in

Who consumes goods and services? Societies decide who consumes the goods and Factor payments  the income people The question of who gets to consume which goods and services lies at the heart of economic systems Each society answers the question of distribution based on

Broad Social Goals for Economies Social goalMeaning Economic efficiency Refers to how well scarce productive resources are allocated to produce the goods and services people want and how well inputs are used in the production process to keep productions costs as low as possible Economic Equity Means what is “fair.” Economic actions and policies have to be evaluated in terms of what people think is right or wrong. Equity issues often arise in questions dealing with the distribution of income and wealth. Some people judge equity based on providing equal opportunity. Others base it on the equality of outcomes. Economic Freedom Refers to such things as the freedom for consumers to decide how to spend or save their incomes, the freedom of workers to change jobs and join unions, and the freedom of individuals to establish new businesses or close old ones Economic Growth Refers to increasing the production of goods and services over time. Economic growth is measured by changes in the level of all final goods and services produced in a particular economy Economic Security Refers to protecting consumers, producers, and resource owners from risks that exist in society. Economic Stability Refers to maintaining stable prices and full employment and keeping economic growth reasonably smooth and steady. Price stability means avoiding inflation or deflation. Full employment occurs when an economy’s scarce resources are fully utilized.

Two Major Economic Systems Free enterprise (free market)  an economic system in which individuals (not government) Command Economy  an economic system in which government

Resources and Government Role Resources  Free Market: – Owned and controlled by Resources  Command: – Owned and controlled Government Role  Free Market: – Small role, does not make decisions on what or how things should be produced – Decisions are made Government Role  Command: – Government sets production levels

Economic Plans, Income Distribution Economic Plan  specifies the – (example: produce more trucks than wheat) Income distribution  how all the income earned is divided among the – Free market  gov’t. doesn’t “care” how income is distributed – Command 

Present Economic Systems Almost all countries today feature parts Mixed economy  an economy that is neither purely