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1.
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Study the introduction above.
Explain what you are expected to learn from this section.
Also, study the vocabulary words and
look for them as you work your way through this lesson.
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In
Chapter 1, you read about the
economic concept of scarcity—that we
cannot have all that
we want or need.
Indeed, in some places in the world, people
cannot even meet their basic needs
for
food, clothing, and shelter because their
resources are too scarce. Scarcity
forces
societies and nations to answer some hard
economic questions. Different
economic
systems have evolved in response to the
problem of scarcity. |
An economic
system is the method used by a
society to produce and distribute goods and services. Which economic system a society employs depends
on that society’s goals and values. | | |
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2.
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What is the main idea in the
paragraph above?
a. | Scarcity is a problem that can never
be solved | c. | Some societies
experience scarcity | b. | Scarcity is a problem that a few different economic systems have
experienced | d. | Different economic systems have
evolved in response to the problem of scarcity. |
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3.
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What is an economic
system?
a. | the method used by a society to
produce and distribute goods and services. | c. | society’s goals and natural resources | b. | a system that explains the culture of a
society | d. | the scarcity of a
society |
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Three Key
Economic Questions
Because economic resources are limited,
every society must answer three
key
economic questions:
• What goods and services should be
produced?
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How should these goods and services be
produced?
• Who consumes these goods and
services?
| What Goods and Services
Should Be
Produced?
Each society
must decide what to produce
in order to satisfy its needs and wants. In
today’s complex
societies, it is often difficult
to distinguish between needs and wants.
While it may be
obvious that we need food
and shelter, modern societies face additional
important
considerations. How
much of our resources should we devote to
national defense, education,
public health
and welfare, or consumer goods? Which
consumer goods should we produce?
Recall
the guns-and-butter trade-off
described in Chapter 1. Because of our
limited resources, each
production decision
that a society makes comes at an
opportunity
cost. | | |
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4.
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Why do societies have to answer
the three economic questions above?
a. | goods and
services | c. | production | b. | scarcity | d. | consumers |
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5.
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Why do the production decisions
that a society makes come at an opportunity cost?
a. | social
needs | c. | social
wants | b. | limited resources | d. | societies are complex |
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6.
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What are the economic ideas
that every society has to answer? (pick all that apply)
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How Should
Goods and Services
Be Produced?
The next question we face is how to use
our resources to produce goods
and
services. For example, should we produce
electricity with oil, solar power, or
nuclear
power? Should teachers have classes of 20
students or 50 students? Should we
produce
food on large corporate farms or
on small family farms?
Although there are countless ways
to
create all of the things we want and need,
all require land, labor, and capital.
These | factors of production can be combined in
different ways. For example,
examine the
chart above (Figure 2.1). Before the introduction of modern farming equipment,
a
typical combination of resources for
producing 15 bushels of wheat was 56
hours of labor,
1 acre of land, and simple
hand tools. With today’s mechanical
farming equipment, farming
is much more
efficient. Forty bushels of wheat can be
harvested from one acre of land with
just
2.9 worker-hours of labor.
Today, capital–not labor–dominates the answer
to how wheat is produced. | | |
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7.
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Which factor of production in
the graphic above is responsible for the increase in the production of wheat?
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Who
Consumes Goods and Services?
In recent years, the top 25 goods manufacturers in the United States have launched an
average of 13 new products each day. Retail stores, which 50 years ago typically carried about 3,000
items, now offer
about 30,000 different products. American
farms produce 315 million metric
tons of
wheat, rice, and corn and maintain about
180 million head of livestock. Despite
this
staggering output, quantities are not
unlimited.
How does this abundance get
divided
up? Who gets to drive a new luxury car and
who can only afford a subway pass?
Who
attends a concert and who stays home?
Who eats a well-balanced diet and who
eats nothing
but hot dogs for every meal?
Who gets access to a good education?
Societies must decide how to
distribute the
available goods and services.
| The answer to the question of
distribution
is determined by how societies choose
to distribute income. Factor payments are
the income people receive
for supplying
factors of production—land, labor, capital,
or entrepreneurship. Landowners
receive
rent, workers receive wages, and those
who lend money to build factories or
buy
machinery receive payments called
interest. Entrepreneurs earn profits if
their
enterprises succeed.
How much should we pay the owners of
the factors of
production? How do we
decide how much a particular piece of land
is worth, how much teachers
should earn
versus how much doctors should earn, or
what the interest rate should
be?
The question of who gets to consume
which goods and services lies at the very heart of
the differences between economic
systems today. Each society answers the
question of
distribution based on its unique
combination of social values and
goals.
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8.
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Which statement below is
true?
a. | The needs and wants of the public
are about the same as they were 50 years ago. | c. | Americans have fewer choices in products than they did 50 years
ago | b. | The top 25 goods manufacturers in the United States have launched most of the
products | d. | Today, Americans have more choices
in the products they consume |
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9.
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The number and amount of goods
and services are
a. | limited | c. | unlimited in good times and limited in bad
times | b. | unlimited | d. | all designed to satisfy the needs of the
people |
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10.
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What determines how the
abundance of U.S. goods and services get divided among the people?
a. | savings | c. | factor payments | b. | investments | d. | the stock market |
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Economic Goals and Societal
Values
Different
societies answer the three economic questions based on the importance they attach to various economic
goals. Figure 2.2 lists some general economic goals that most economic systems try to address. Bear
in mind that societies pursue each of these goals, to some degree, at the expense of the
others.
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11.
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Which statement below is
not true?
a. | Societies vary in the importance
they attach to each of the economic goals above | c. | How a society answers the three economic questions depend on the importance
the attach to each of the economic goals above | b. | Placing importance on some goals makes others
suffer. | d. | All societies treat each of the economic goals the same
way |
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Economic
Efficiency
Because
resources are always scarce—that
is, they always involve an opportunity
cost—most
societies try to maximize what
they can get for the resources they have to
work with. If a
society can accurately assess
what to produce, it increases its economic
efficiency. A
manufacturer would be
wasting resources producing record albums
if people prefer to buy CDs.
Knowing the
best way to produce a product cuts waste,
too. Of course, in the end, products need
to
reach consumers. An economy that can’t
deliver goods isn’t
efficient.
| Economic
Freedom
Most of us value
the opportunity to make
our own choices. How do you feel about
laws that keep you from earning
an
income? What about laws that forbid you
to make certain purchases or possess
certain
items? The economic systems of
different nations allow different degrees of
economic freedoms.
In general, however,
people all over the world face limitations
on economic freedom.
In
the United States, the economic
freedoms that we as Americans enjoy are
an important reason for
our patriotism.
Patriotism is the love of one’s country—the
passion that
inspires a person to serve his
or her country, either in defending it from
invasion or
protecting its rights and maintaining its laws and institutions. The
freedoms that allow any
American who so
chooses to become an entrepreneur, for
example, are continuing sources of
pride
and patriotism.
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12.
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What is economic
efficiency?
a. | the ability of a society to
distribute goods and services equally | c. | the ability of a society to maximize economic
freedom | b. | the ability of a society to get the most out of its available
resources | d. | the importance society places on
issues such as global warming and abortion |
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13.
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What idea below is a source for
American patriotism?
a. | the United
Nations | c. | economic
freedom | b. | the prosperity that exists in America’s inner
cities | d. | global
warming |
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Economic
Security and Predictability
Most people don’t like uncertainty. We
want to know that we can get milk
and
bread every time we go to the grocery store,
or that the gas pumps will be full when we go
to gas up our cars. We want to feel
confident that we will get our paychecks
every payday.
Ideally, economic systems
reassure people that goods and services will
be available when they
need them and that
they can count on receiving expected
payments on
time.
| We also want the security of knowing
that help is available if we are
elderly,
poor, unemployed, or facing some other
potential economic disadvantage. Most
people
feel that the government should
provide some kind of safety net, or set of
government programs that
protect people
experiencing unfavorable economic conditions.
These include injuries,
layoffs,
natural disasters, or severe shortages.
Most countries also believe in
providing
some sort of base income for retired
persons to ensure that older people
can
support themselves after retirement. | | |
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14.
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What is a safety
net?
a. | The help society provides to people
who may suffer economic hardship | c. | scientific advancement that promotes economic
advancement | b. | economic freedom | d. | economic income equality. |
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15.
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What is economic security and
predictability?
a. | the knowledge that the society is
advancing in science and technology | c. | the confidence that economic resources will be there when we need
them | b. | the confidence that people are free to make economic
choices | d. | the confidence that all citizens are sharing equally in
the nations resources |
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Economic
Equity
Each society must
decide the best way to
divide its economic pie. What constitutes a
fair share? Should everyone
get the same,
or should one’s consumption depend on
how much one produces? How
much
should society provide for those who are
unable or unwilling to
produce?
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Many people believe in equal pay for
equal work, but society does not
value all
jobs equally. Most lawyers earn more than
most nurses. Most computer
programmers
earn more than most truck drivers. Not
everyone is able to work. How should
we
provide for the ill and infirm? | | |
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16.
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Economic equity refers
to
a. | the way society apportions its
economic resources among its citizens | c. | the degree of political democracy that exists in a
society | b. | the development of its natural resources | d. | the degree of economic freedom in a
society |
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17.
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Which economic system provides
the most economic freedom from government control?
a. | Socialism | c. | Capitalism | b. | Communism |
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18.
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In which economic system are
you likely to find greater differences in the income of its citizens?
a. | Capitalism | c. | Communism | b. | Socialism |
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Economic
Growth and Innovation
A
nation’s economy must grow for a nation
to improve its standard of living, or level
of
economic prosperity. This is especially true
if a country’s population is growing.
The
economy also must grow to provide new
jobs and income for people.
Innovation plays a
huge role in economic
growth. Think of the changes brought
about by the shift from nomadism to
agriculture, from the agricultural age to the
industrial age, from the industrial age to
the
information age. Innovations in technology
increase the efficiency of production
and usher in
new goods and services. In
your lifetime, you are witnessing innovations
in computer and
networking technology
that are changing the ways people
work, shop, conduct business, locate
information, and communicate.
| Additional
Goals
A society may
value goals in addition to those
described above. Environmental protection,
full employment,
universal medical care, and
other important concerns may be among a
nation’s chief
economic goals.
All nations must prioritize their
economic goals, or arrange them in
order
of importance. No matter how a nation
prioritizes its goals, one fact
remains:
achieving any economic goal comes only
with some kind of economic
trade-off. | | |
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19.
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Which of the following does
not require the economy to
grow?
a. | economic
equity | c. | increased number of
jobs | b. | growing population | d. | higher standard of living |
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20.
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In order for an economy to
grow
a. | it must maintain current ways
of doing things | c. | it must be willing
to change even if some current industries must die | b. | it must use computers and
networks | d. | it must preserve peoples
jobs |
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21.
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Which statement is
true?
a. | Achieving economic goals involves
economic trade-offs | c. | Environmentalism
is a win win economic goal without costs | b. | You can achieve an economic goal without harming other
goals | d. | If a society prioritizes its goals it can avoid economic
trade-offs. |
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Economies
and Values
Four
different economic systems have
developed to address the three key
economic questions. Each
system reflects a
different prioritization of economic goals.
It also reflects the values of
the societies in
which these systems are present.
Traditional Economies
A traditional economy relies on
habit,
custom, or ritual to decide what to produce, how to produce it, and to whom
to
distribute it. There is little room for
innovation or change. The traditional
economic system
revolves around the
family. Work tends to be divided along
gender lines. Boys tend to take up
the occupations of their fathers, while girls follow
in the footsteps of their
mothers.
Traditional economies are usually
communities that tend to stay
relatively
small and close. Often these societies work
to support entire groups, rather than
just
themselves or their immediate families.
Agricultural and hunting practices usually
lie
at the very heart of the people’s lives,
laws, and religious beliefs. |
Societies
with traditional economies
have few mechanisms in place to deal effectively with the effects of
environmental
disaster, such as a flood or drought. They
also tend to remain stagnant,
resisting
change at both the individual and community
level. They may be slow to adopt
new
technology or radical new ideas. They may
not have access to goods you see every day
at
the grocery store. In most cases, these
communities lack modern conveniences
and have a low
standard of living.
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22.
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Which statement is
not true of traditional economies?
a. | they embrace technology and
change | c. | they stress equality over
growth | b. | they preserve old ways of doing things | d. | there are usually clearly defined gender
roles |
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Market
Economies
In a market
economy, economic decisions are made by individuals and are based on
exchange, or trade. The
choices made by
individuals determine what gets made and
how, as well as who consumes the
goods
and services produced. Market economies
are also called free markets, or
capitalism.
You will read about the free market in
detail in Section 2.
Command
Economies
In a
centrally planned economy, the central
government alone decides how to answer
all three
key economic questions. Centrally
planned economies are sometimes called
command economies,
because a central
authority is in command of the economy.
Section 3 discusses the theories
behind
centrally planned economies. |
Mixed Economies
Most modern economies are
mixed
economies—market-based economic systems in which government plays a limited
role. Section 4 describes the reasons for mixed economies and the various ways government is involved
in such economies.
 Command Economy
National
Socialism | | |
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23.
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What is another name for market
economies?
a. | command
economies | c. | socialism | b. | capitalism | d. | traditional economies |
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24.
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Why are centrally planned
economies called “command economies?”
a. | the people make all of the economic
decisions with the purchases that they make | c. | economic decisions are made by “commanders” appointed by the
president | b. | the market commands the economy | d. | all economic decisions are commands from the central
government |
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25.
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In a most mixed economies, what
role does the government play.
a. | imperialist
role | c. | command
role | b. | limited role | d. | no role |
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a. | economic freedom | d. | other issues | b. | economic security and predictability | e. | Economic efficiency | c. | economic equity | f. | economic growth and innovation |
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26.
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The economy needs to be in a
constant state of growth brought about by innovation, science and creativity
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27.
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Your society has an abundance
of oil and you believe that the society should extract as much as possible to make the society
wealthy
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28.
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The main goal of society
should be to make sure that all citizens have equal income
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29.
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The economy needs to be
productive, stable and provide social security and medicare to those who need
support
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30.
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Individuals and businesses
should be free of government regulation so they can be as productive as
possible.
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31.
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social issues such as
“global warming” and “abortion” should be the primary goal of the
economy
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a. | safety
net | d. | patriotism | b. | economic system | e. | factor payments | c. | standard of living |
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32.
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level of economic prosperity
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33.
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the method used by a society to produce and distribute
goods and services
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34.
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the love of one’s country; the passion that inspires
a person to serve his or her country
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35.
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the income people receive for supplying factors of
production, such as land, labor, or capital
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36.
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government programs that
protect people experiencing unfavorable economic conditions
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a. | traditional
economy | d. | market
economy | b. | centrally planned
economy | e. | command economy | c. | mixed economy |
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37.
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economic system in which
decisions on production and consumption of goods and services are based on voluntary exchange in
markets
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38.
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economic system in which a
central authority is in command of the economy; a centrally planned economy
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39.
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economic system that relies on
habit, custom, or ritual to decide questions of production and consumption of goods and
services
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40.
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market-based economic system
with limited government involvement
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41.
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economic system in which the
central government makes all decisions on the production and consumption of goods and
services
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