Economics Unit 2: Competitive Markets Lesson 6: Fundamental Economic Questions

Resource Allocation Every society must have some method or set of rules by which to allocate its scarce resources. Ex. Basketball tickets – sell, give away, auction Each method of resources allocation involves some sort of discrimination – based on relationships, wealth, location, or timeliness Economic systems operate in a similar way – based on dollars, customs, govt. rules

3 Fundamental Economic Questions What will be produced and in what quantity? How will it be produced? For whom will it be produced?

Decisions, Decisions… Will a society produce mainly food, or should it produce cars, planes, computers, etc.? How much of each will be produced? How should we produce? Labor intensive with lots of people or capital-intensive with lots of machines? How will the output be distributed among the society’s citizens?

Three Economic Systems Traditional economy – one in which families, clans, or tribes take care of production & distribution by following the customs that have been handed down each generation

Three Economic Systems cont’d Command economy – govt. officials decide what goods & services will be produces, how they will be produced, & how they are distributed The government owns and controls all means of production The government controls, by force, the lives of its citizens

Three Economic Systems cont’d Market economy – based on individual choice & voluntary exchange; consumers are free use $$$ as they wish, to enter into business, or to sell their labor to whomever they want Competition and prices regulate a market economy. Prices emerge from voluntary trade and coordinate the activities of millions of people

Mixed Economy All modern economies (economic systems) are basically mixed economies – have elements of traditional, command, & market systems

Capitalism Capitalism (Free Enterprise System) – based on private ownership of the factors of production; producers will produce the goods & services that consumers want; consumers buy the goods & services they satisfy them the most Producers seek profits - $$$ left over after costs have been subtracted from revenues Govt. role limited in capitalist economy – nat. defense, enforce laws, ect...

Socialism Socialism – an economic system in which the govt. owns some or all of the factors of production Often called democratic socialist countries – Ex. Sweden Often have elected govt. & many privately owned business but govt. has strong regulatory powers to distribute resources more equally

Communism Communism – similar to socialism but under control of authoritarian government; leaders are not democratically elected Little or no private ownership of property Little or no political freedom Ex. China, North Korea, Cuba Read pg. 53 – Communism vs. Capitalism

Why did Communism Fail? Communism failed – w/out private property – incentive to work hard was non-existent Commands replaced voluntary exchange, and fear replaced self-interested behavior The system became inefficient, planning became too complex, and negative growth resulted. Remember the PPC?