Goals:
Key Terms:
How the questions are answered indicates the type of economic system that exists in each country.
What to Produce? – Nations differ in the type and amount of resources just as individuals differ in their skills and abilities. Some nations have rich soil and regular rains that yield large food supplies. Other nations have desert climates or long, cold winters that make farming difficult. Some countries have abundant supplies of oil, coal and other energy sources, while many countries have only a limited supply. A nation will use its natural resources to determine what can be produced. It can also decide to trade some of its resources with other countries to obtain its needs.
Just as nations differ in the type and amount of resources, they also differ in their needs. One country may invest in manufacturing, another in agriculture, and a third in security. Some nations have colleges and universities that product a large number of skilled engineers and technology experts. Other countries have low literacy rates and many unskilled workers. Highways, roads, airports and shipping ports may be highly developed and functional or transportation may be very difficult.
Deciding how to use resources and what to produce is a very difficult decision. If a country spends too much in one area, there may not be enough resources to meet other needs. If most resources are used to produce the products consumers want, not enough attention may be paid to meeting business needs.
How to Produce? – Nations must decide what combination of resources will best suit their circumstances. As a country develops, tasks that were traditionally performed using human skills, such as farming, are now performed with faster, more efficient tools and equipment. Two centuries ago, more than 80% of U.S. citizens were involved in agriculture. Today less than 3% of the U.S. population produces the food the country consumes. The labor needs of the U.S. economy have changed. The complex 21st century economy requires highly specialized health care professionals, financial managers, computer specialists, and others who can design and produce the goods and services that you need and want.
Each country decides how to use its resources to produce the goods and services it needs. It may rely on unskilled or skilled labor, on advanced or simple technology, on its own resources or on those it obtains from other countries. Economic resources can be combined in different ways to produce similar goods and services.
What Needs and Wants to Satisfy? – Because the wants and needs are unlimited, many will remain unmet when a country decides what goods and services to produce. A country must determine which needs and wants are the most critical when deciding what goods and services to produce. Some countries may decide to invest in capital goods, while others produce more consumer goods. Some countries devote more resources to producing the goods and services required by the government. Other economies respond to those citizens who have the most money or the most political power.
In the United States, goods and services are plentiful. What wants and needs you satisfy largely depends on how much money you have and how you choose to spend or save it. The amount of money you have available to spend depends a great deal on your education and ability and how you decide to use them to earn income.
Command Economy – In a command economy, the resources are owned and controlled by the government. Government officials decide what and how goods are produced and how they will be distributed and shared. They decide how much of the resources will be used to produce goods and services for consumers, such as food products, vehicles, or houses. They also decide how much of the resources will be used to produce capital goods, including machinery, equipment, and factories.
In a command economy, the government may decide to build a superior military or a world-class education system. They may decide to spend money to research new technologies or to build housing for the poor. Some command economies are so strict that government officials assign people to specific schools and even careers. Person economic freedom is limited in command economic systems.
Market Economy – In a market economy, the resources are owned and controlled by the people of the country. The three economic questions are answered by individuals through buying and selling of goods and services in the marketplace. The marketplace is anywhere that goods and services exchange hands. This includes a supermarket, the Internet, a business office, or even a flea market.
When a business buys a new truck or orders several tons of steel, it is making an economic decision. An individual consumer who orders a movie on a pay-per-view channel, takes a vacation, or enrolls in college is also making an economic decision. No one directs consumers to make a particular purchase or tells businesses what they must produce. The government has limited involvement in a market economy. Consumers and businesses make decisions on their own self-interest. Every time consumers buy products in the marketplace, they “vote” with their dollars. They send a message to businesses regarding their buying preferences, helping to direct the use of resources. Businesses make decisions on what goods and services will be produced based on what goods and services will be produced based on how they decide to use their resources. When they offer the products and services consumers want, they are rewarded with profits. By those independent decisions, individual producers and consumers answer the three economic questions.
Traditional Economy – Before complex economic systems developed, simple economies operated according to tradition or custom. In a traditional economy, goods and services are produced the way that has always been done. The traditional economy is used in countries that are less developed and are not yet participating in the global economy.
In those countries, the answers to the three economic questions are still established by their traditions. Goods are produced the way they have always been produced for generations. Children are taught to use the same methods to make the same goods their ancestors produced. They often use the natural resources readily available to them and the hand tools they make. They will consume most of what they produce and will sell or trade the rest with people who live close to them.
The traditional economy is usually centered on meeting the basic needs of people, such as food, clothing, and shelter. While the global economy has brought change and growth to the farthest corners of the world, there are still pockets of people living in traditional economic systems. Because these economies lack the many formal structures found in more advanced systems, they usually have limited amounts of material wealth and limited investment in improving their condition.
Mixed Economies – Most nations of the world can be classified as mixed economy. A mixed economy combines elements of command and market economies. While the past half-century has seen a shift away from the command economies and toward market economies , various degrees of government involvement in the marketplace exist.
The former Soviet Union disbanded and became fifteen independent nations in the early 1990s. For more than seventy years, the Soviet Union operated under a command economic system called communism. Under communism the Soviet Union underwent a series of government-led plans to direct resources toward economic growth. This led to a limited choice and supply of consumer goods. Often, consumers found it difficult to find products such as bread or a hammer.
During the past decade, several of the Eastern European nations that had used a command economy have made major progress in changing over to a mixed economy. Some of these countries made such economic progress that they were granted membership into the European Union.
More than 1.3 billion Chinese citizens have a communist government that controls most of the resources and decisions. The economy of China is adopting elements of a market system for a growing number of economic decisions. Entire regions of the country, particularly the eastern cities bordering the ocean, are enjoying a booming consumer economy based on greater individual freedom of choice. China is fast becoming a world leader in goods and services produced. A competitive education system produces many skilled workers who are earning money to pay for the goods and services they want.
As many countries with traditional economies develop, they often adopt mixed economies. The government makes many of the decisions about how the country’s resources will be used to develop schools, hospitals, roads, and utilities. As people become educated and develop new skills, they are able to obtain jobs and earn money. They then have the resources to purchase more goods and services. Often businesses from other countries will begin to sell products and services in the developing country or even open a business there, offering jobs, and locally produced products to the citizens.
Another name for the economic system in the United States is capitalism. Capitalism refers to the private ownership of resources by individuals, rather than by the government. Individual owners are free to decide what to produce. Individual consumers are also free to decide what they want to buy. This freedom of production and consumption decisions lends itself to another name also associated with the U.S. economy – free enterprise or private enterprise. Individual freedom is vital to the success of the U.S. economy.
The U.S. economic system is based on four important principles. They are private property, freedom of choice, profit and competition.
Private Property –The right of private property means you can own, use, or dispose of things you value. In the United States, you can own anything you want, as long as it does not violate the law. If you invent something of value, you are protected from others taking your idea.
Freedom of Choice - The private enterprise economy is based on freedom of choice. Freedom of choice means that you can make decisions independently and must accept the consequences of those decisions. Business owners can decide where to open a business, what to sell, and how to operate the company. Consumers can decide where to shop, what to buy, and what they want to spend. Only when individual decisions harm others will the government regulate freedom of choice.
Profit – Businesses invest resources and take risks for one primary purpose – to earn a profit. Profit is the money left from sales after all of the costs of operating a business have been paid. Because businesses are not guaranteed a profit, they may lose the money they have invested. Hey are challenged to work hard, invest wisely, and produce goods and services that are needed in order to make a profit.
Profit is at the heart of the private enterprise system. Earning a profit is not the only reason for investing money and operating a business. People enjoy the challenge and freedom of business ownership, as well as the satisfaction of providing goods and services that other people want.
Competition – The rivalry among businesses to sell their goods and services is known as competition. Consumers have many choices of products and services and will select the one they believe will provide the greatest satisfaction for the money. Businesses must work to improve their products and reduce their costs. If customers are not satisfied with one company’s offerings, they will look for another choice. Competition forces businesses to improve products, keep costs low, provide effective customer service, and search for new ideas.
Assignment 1 - Ecomonic Systems
Define Chapter 1-3 Key Terms.
You represent the citizens of a new country deciding on an economic system. You want to establish a successful economy that provides the greatest benefit to its citizens. What information about the country would you need to know in order to answer the three economic questions?
Assignment 2 - The U.S. Economic System
1 - List five terms that can be used to describe the U.S. economic system. Identify the advantages and disadvantages of each one for consumers and businesses.
2 - “Profit is the heart of the private enterprise system.”
Why is profit necessary for the economy of the United States to work effectively?
Are there any benefits to the consumers when a business makes a profit.
3 - List the three common types of economic systems and identify their main differences.
Please wait...