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2.1 ANSWERING THE THREE ECONOMIC QUESTIONS

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ECONOMICSMR. HOOD05 FEBRUARY 2014

2.1 ANSWERING THE THREEECONOMIC QUESTIONS

ECONOMICSMR. HOOD`S NOTES05 FEBRUARY 2014

SECTION FOCUSALL SOCIETIES MUST ANSWER THREE KEY ECONOMIC QUESTIONS ABOUT THE PRODUCTION AND CONSUMPTION OF GOODS AND SERVICES. HOW A SOCIETY ANSWERS THESE QUESTIONS DEPENDS ON HOW MUCH IT VALUES DIFFERENT ECONOMIC GOALS. FOUR DIFFERENT ECONOMIC SYSTEMS HAVE DEVELOPED IN RESPONSE TO THEE THREE QUESTIONS.

INTRODUCTION

WE HAVE LEARNT ABOUT SCARCITY

WE HAVE LEARNT THAT WE CANNOT HAVE EVERYTHING WE

WANT OR NEED

IN FACT, MANY PEOPLE

FAIL TO MEET BASIC NEEDS

WE LEARNT THAT SCARCITY FORCES US TO ANSWER HARD

QUESTIONS

COUNTRIES THEREFORE HAVE

ECONOMIC SYSTEMS

OBJECTIVE 1IDENTIFY THE THREE

ECONOMIC QUESTIONS OF WHAT TO PRODUCE, HOW TO

PRODUCE, AND WHO CONSUMES WHAT IS

PRODUCED

RESOURCES ARE LIMITED

SO WE HAVE 3 ECONOMIC QUESTIONS

WHAT GOODS AND SERVICES SHOULD BE

PRODUCED?

OR

HARD TO DISTINGUISH BETWEEN

NEEDS AND WANTS

EG: CONSUMER GOODS V HEALTH

EACH DECISION INVOLVES

AN OPPORTUNITY COST

HOW SHOULD THESE GOODS AND SERVICES BE

PRODUCED?

HOW TO USE RESOURCES?

COUNTLESS WAYS TO MAKE OR CREATE WHAT

WE WANT

WHO CONSUMES THESE GOODS AND

SERVICES?

TODAY WE HAVE THOUSANDS OF

CONSUMER GOODS

BUT QUANTITIES ARE

NOT UNLIMITED

DEPENDS OF FACTOR PAYMENTS, OR

SALARIES

OBJECTIVE 2ANALYZE THE SOCIETAL

VALUES THAT DETERMINE HOW A COUNTRY ANSWERS THE

THREE ECONOMIC QUESTIONS

DIFFERENT COUNTRIES ANSWER QUESTIONS

DIFFERENTLY

VARIOUS ECONOMIC GOALS

1 – ECONOMIC EFFICIENCY

MAKING THE MOST OF

RESOURCES

2 – ECONOMIC FREEDOM

FREEDOM FROM GOVERNMENT INTERVENTION

IN THE PRODUCTION + DISTRIBUTION OF GOODS

3 - ECONOMIC SECURITY AND

PREDICTABILITY

ASSURANCE THAT GOODS AND SERVICES WILL BE AVAILABLE, PAYMENTS WILL BE MADE ON TIME, AND A SAFETY NET WILL PROTECT INDIVIDUALS AT TIMES OF

ECONOMIC DISASTER

4 - ECONOMIC EQUITY

FAIR DISTRIBUTION OF

WEALTH

5 - ECONOMIC GROWTH

AND INNOVATION

INNOVATION LEADS TO ECONOMIC GROWTH, AND

ECONOMIC GROWTH LEADS TO A HIGHER STANDARD OF LIVING

6 - OTHER GOALS

SOCIETIES PERSUE ADDITIONAL GOALS, SUCH AS ENVIRONMENTAL

PROTECTION

OBJECTIVE 3EXPLAIN THE

CHARACTERISTICS OF TRADITIONAL COMMAND, AND

MARKET ECONOMIES, AND DESCRIBE THE SOCIETAL

VALUES THAT INFLUENCE THEM

THERE ARE FOUR DIFFERENT ECONOMIC

SYSTEMS…

… THAT ANSWER THE 3 ECONOMIC QUESTIONS

1 – TRADITIONAL ECONOMIES

RELIES ON HABIT CUSTOM OR RITUAL

TO DECIDE

NO ROOM FOR INNOVATION OR CHANGE

REVOLVES AROUND FAMILY

EG: AFRICAN COUNTRIES

2 – MARKET ECONOMIES

DECISIONS MADE BY INDIVIDUALS

BASED ON EXCHANGE,

OR TRADE

ALSO KNOWN AS FREE MARKET OR

CAPITALISM

EG: UNITED STATES

3 – COMMAND ECONOMIES

CENTRALLY PLANNED ECONOMIES

DECISIONS MADE BY GOVERNMENT

EG: CUBA, NORTH KOREA, RUSSIA

4 – MIXED ECONOMIES

MOST MODERN ECONOMIES

ARE MIXED

GOVERNMENT PLAYS A LIMITED

ROLE

EG: UNITED STATES