Answering 3 Economic Questions Scarcity and Society • • • Due to scarcity, societies and countries are forced to make some difficult decisions. To aid in this process different systems have evolved over time. Economic System – the method used by a society to produce and distribute goods and services based on its values and goals. The 3 Economic Questions Each society must answer the following economic questions… • • • What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services? What Should Be Produced? • • Each society works to meet the needs and wants of its members. Culture plays a significant role in this process. How Should It Be Produced? • • Each society must determine how to use its factors of production to meet the demands of that society. Land, Labor and Capital Who Consumes the Products? • • The answer to this is how the society chooses to distribute income. Factor Payments – the income people receive for supplying the factors of production. Factor Payments • • • • Landowners receive rent. Workers receive wages. Entrepreneurs receive profits. Those who lend money to build factories or buy machinery receive interest payments. Economic Goals • • • • • • Economic Efficiency Economic Freedom Economic Security and Predictability Economic Equity Economic Growth and Innovation Additional Goals Additional Goals • • Environmental Protection Full Employment • • • Universal Medical Care A Safety Net A rising Standard of Living Four Economic Systems Four different economic systems have developed in order to address the three key economic questions of every society. • • • • Traditional Economies Market Economies Command Economies Mixed Economies Traditional Economies • • • • • • Rely on habit, custom, or ritual. Little room for innovation or change. Revolves around the family. Work is divided by gender. Agricultural and hunting practices. Slow to adapt to new technology and ideas. Market Economies • • • Decisions are made by individuals. The use of exchange or trade in a free market. This system is also known of as capitalism. Command Economies • • The central government decides all three of the key economic questions. This system is also known as a centrally planned economy, or Communism. Mixed Economies • • • • Most modern economic systems are mixed. A market-based economic system with limited government interference. This system is also known of as Socialism. This is the economic system we use in the U.S.A.