2.  All societies have an economic system or a way of providing for the wants and needs of their people.  An Economic Systems function is to produce and distribute goods and services to consumers

3. An economy must answer 3 economic questions: What should be produced? How should it be produced? Who will consume these goods and service?

4.  How a society answers these questions depends on how much it values economic goals of efficiency, freedom, security, equity and growth.

5. 1) What goods or services should be produced? -How much resources should be devoted to national defense? Education? Health care?

6. 2) How should it be produced?  -Should we have coal, oil, or nuclear power? Should teacher have 20 kids or 50 kids in a room?

7. 3) Who consumes the goods and services? - How will society distribute income? Who will buy the household products? Who will clean your house?

8.  Traditional economy : Relies on habit or custom. Little innovation. Similar to family system. Boys follow dad’s footsteps, girls follow mom. Examples: Hunting, farming. Low standard of living.

9. Market economy : Decisions made by individuals based on exchange, trade. (aka free markets, capitalism)

10. Centrally planned economy : (aka command economy) Government decides everything. Example: communism.

11.  Mixed economy : Market-based economy where government plays a limited role. This is the United States.

12.  Allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit or custom.  Individuals are not free to make own decisions.  Advantage : everyone knows the role they play  Disadvantage : discourages new ideas

13.  People and firms make decisions based on what best suits their interest. Ex. USA, Canada and Great Britain  Advantage : overtime it can make changes in demand. Ex. Fast food to health food  Disadvantage : does not always provide for basic needs of people. Ex. Homeless people

14.  A central authority (government) makes most of the decisions.  People have little if any influence over production. Ex. North Korea, Cuba and former Soviet Union.  Advantage : can change direction drastically in a short time. Ex. farming to industrial  Disadvantage : Not designed to meet the wants of consumers (Everyone gets only 1 In and Out burger.

15.  Market : An arrangement that allows buyers and sellers to exchange things.  Markets exist because it allows people to buy what they need to consume and sell goods and services they produce.

16.  Specialization : The concentration of the productive efforts of individuals and firms on a limited number of activities.  Example: a mechanic specialized in fixing Japanese cars or and assembly line

17.  Household : A person or group of people living in the same residence.  Firm : Business; an organization that uses resources to produce a product  Factor market : Market in which firms purchase the factors of production (land, labor, capital) from households

18. Profit : The financial gain made in a transaction Product market : The market in which households purchase the goods and services that firms produce.

19.  Free market is an economic system where people do what’s best for them for personal gain.  Consumers have an interest in looking for lower prices  Producers engage in a competition for consumer’s money.

20.  Wrote The Wealth of Nations in 1776  Known as the Father of Economics  Said people are selfish, but that’s ok because it works  Called the relationship between self interest and competition the invisible hand  Said government should stay out of the economy (laissez faire means ‘hands off’)  Government should only be involved with education, health care and transportation.

21.  Self-interest is the motivating force behind the free-market. People produce goods and services for their own personal gain.  Competition is the struggle among producers for the dollars of consumers. This helps control firm’s selfishness.  Competition act’s as a regulating force in the marketplace. Without competition a business can monopolize a product or service

22.  rewards efficient producers and buyers  results in:  goods society wants  quantity society wants  prices society is willing and able to pay  normal profits

23.  The Free Market Economy, however, does need some Government intervention to provide for things that the market place does not address.  Example: national defense, roads and highways, education, and health care  Incentive : The hope of reward or the fear of punishment that encourages people to act in a certain way.

24.  Why is the free market system good?  1) It works. Producers make what consumers want, when they want it. Prices are pretty good.  2) Freedom. Work where you want, buy what you want, make what you want.

25.  3) Growth is encouraged because innovation is encouraged.  4) A wide variety of things get made because consumers decide what gets made.

26.  Consumer sovereignty is the power of consumers to decide what gets produced

27.  Scarcity exists  Societies must find a way to allocate scarce goods and services  In any allocative mechanism, some people will be told “No.”  The market system is efficient, but…  Neither markets nor other economic systems are “fair.”

28.  In command economies, the government controls the factors of production and answers the 3 economic questions of what, how and for whom to produce for all of society.  Idea is that the government makes all the choices that will benefit or is best for the whole society, not just a few individuals  Command economies often associated with socialism, communism and authoritarianism.

29.  Socialism is the belief that democratic means should be used to distribute wealth evenly through a society  Communism is the belief that government leaders should distribute wealth evenly through a society.  Authoritarianism (Fascism)- requiring strict obedience to an authority, such as a dictator. No individual freedoms.

30. Problems  Poor Quality of Goods= workers don’t care, as long as they produce what they are told to produce  Shortages of Goods and Services= need products are not made  Diminishing Production = workers don’t care, they don’t get raises for producing more; no incentives  Performance always falls short of ideals that the system is built  Can’t meet the needs of consumers needs and wants: Government decides what is produced, not consumers  The system does not reward innovation, is not flexible, and sacrifices individual freedoms for the “good” of whole society