Chapter 2: Economic Systems and the American Economy

Economic System  The way a nation determines how to use its resources to satisfy people’s needs and wants  Each nation is faced with answering 3 questions…..  The way a nation determines how to use its resources to satisfy people’s needs and wants  Each nation is faced with answering 3 questions…..

3 questions  What should be produced?  How should it be produced?  For whom should it be produced?  What should be produced?  How should it be produced?  For whom should it be produced?

WHAT SHOULD BE PRODUCED?  If more of one item is produced, then less of something else will be produced.  Example: If government uses resources to build new roads, then fewer RESOURCES are available to maintain schools.  If more of one item is produced, then less of something else will be produced.  Example: If government uses resources to build new roads, then fewer RESOURCES are available to maintain schools.

HOW SHOULD IT BE PRODUCED?  Decisions must be made as to what the best combination of available inputs will be to get the job done for the lowest possible cost  Example: How many workers? Skilled vs. unskilled? Will capital goods be used? What kinds of technology is needed?  Decisions must be made as to what the best combination of available inputs will be to get the job done for the lowest possible cost  Example: How many workers? Skilled vs. unskilled? Will capital goods be used? What kinds of technology is needed?

FOR WHOM SHOULD IT BE PRODUCED?  System under people live determines how the goods and services will be distributed.  In U.S., most goods and services are distributed through a price system. Other economies may distribute through majority rule, lottery, military force, etc.  Ex: Who benefits from a new city school? Who lives in new apartments?  System under people live determines how the goods and services will be distributed.  In U.S., most goods and services are distributed through a price system. Other economies may distribute through majority rule, lottery, military force, etc.  Ex: Who benefits from a new city school? Who lives in new apartments?