Fundamental Economic Questions • Because of scarcity—every nation must answer the three fundamental economic questions: • What products will be produced? • How will the products be produced? • For whom will the products be produced?
What to Produce? • The What question • Requires an economy to decide the mix & quantity of goods and services that it will produce. • In US, free enterprise with consumer sovereignty answers the What question.
How to Produce? • The How question • Which combination of technology and resources to use for producing goods and services. • Should labor be more or less capital-intensive • Education plays an important role • Improves the ability of workers to perform their work
For Whom to Produce? • The For Whom question • Which people receive the goods and services produced • In a free market system • Price is used to decide who will receive the goods and services that are produced. • Earn more money = buy more products
Economic systems • Economic system • The methods used to answer the What, How, and For Whom questions. • Traditional • Market • Command
Traditional Economy • Answers the questions, the way they have been answered for generations. • Inuit of Canada • Amish of Pennsylvania • + Reduces friction among members • -- Restricts individual initiative
Market Economy • Answers the three basic questions based only on voluntary buying and selling in markets. • Adam Smith • Invisible hand: the best interests of a society are served by markets guided by self-interest. Read/Think/Pair/Share
Market Economy • -- very wealthy and very poor • + inequality gives people an incentive to strive for the reward of earning more income • Milton Friedman • http://www.youtube.com/watch?v=RWsx1X8PV_A
Command Economy • Answers the questions by a dictator or central authority • Former Soviet Union • China in the past • Cuba & North Korea
Command Economy • Socialism: based on govt. ownership of resources and centralized decision making • Karl Marx • Communism: classless economic system in which all resources are owned by the workers • The ideal version of socialism
Mixed Economy • Mixed Economy • Answers the questions through a mixture of traditional, command, and market systems. • Most countries employ a mixed economy • United States • Nationalization • The act of transforming a private enterprise into a government enterprise • Amtrak • General Motors