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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.
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.


What is the main idea in the paragraph above?
Scarcity is a problem that can never be solved
Some societies experience scarcity
Scarcity is a problem that a few different economic systems have experienced
Different economic systems have evolved in response to the problem of scarcity.


What is an economic system?
the method used by a society to produce and distribute goods and services.
society’s goals and natural resources
a system that explains the culture of a society
the scarcity of a society
Three Key Economic Questions

Because economic resources are limited,
every society must answer three key
economic questions:

• What goods and services should be
• How should these goods and services be
• 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


Why do societies have to answer the three economic questions above?
goods and services


Why do the production decisions that a society makes come at an opportunity cost?
social needs
social wants
limited resources
societies are complex


What are the economic ideas that every society has to answer? (pick all that apply)
Which human rights will society protect
How the goods and services will be produced
Which goods and services will be produced
Who will consume the goods and services
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.


Which factor of production in the graphic above is responsible for the increase in the production of wheat?
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

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.  


Which statement below is true?
The needs and wants of the public are about the same as they were 50 years ago.
Americans have fewer choices in products than they did 50 years ago
The top 25 goods manufacturers in the United States have launched most of the products
Today, Americans have more choices in the products they consume


The number and amount of goods and services are
unlimited in good times and limited in bad times
all designed to satisfy the needs of the people


What determines how the abundance of U.S. goods and services get divided among the people?
factor payments
the stock market
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.


Which statement below is not true?
Societies vary in the importance they attach to each of the economic goals above
How a society answers the three economic questions depend on the importance the attach to each of the economic goals above
Placing importance on some goals makes others suffer.
All societies treat each of the economic goals the same way
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. 


What is economic efficiency?
the ability of a society to distribute goods and services equally
the ability of a society to maximize economic freedom
the ability of a society to get the most out of its available resources
the importance society places on issues such as global warming and abortion


What idea below is a source for American patriotism?
the United Nations
economic freedom
the prosperity that exists in America’s inner cities
global warming
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.


What is a safety net?
The help society provides to people who may suffer economic hardship
scientific advancement that promotes economic advancement
economic freedom
economic income equality.


What is economic security and predictability?
the knowledge that the society is advancing in science and technology
the confidence that economic resources will be there when we need them
the confidence that people are free to make economic choices
the confidence that all citizens are sharing equally in the nations resources
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?

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?


Economic equity refers to
the way society apportions its economic resources among its citizens
the degree of political democracy that exists in a society
the development of its natural resources
the degree of economic freedom in a society
nar010-1.jpgIn socialist economies economic equality is measured by how big your piece of the economic pie is.
If we increase the size of your slice, someone elses slice will have to be smaller. Socialists try to give each group in the society the same size slice of the pie.

In socialist societies the government determines how big your slice will be.
In capitalist societies they simply bake more pies. By increasing the size of the economy (more pies) people are able to acquire more and bigger slices. In fact there is no limit on the number of pies capitalist economies produce.

In capitalist societies individuals determine how big and how many slices of the pie they will consume. Your willingness to work hard and your entrepreneurial skills determine your “pie wealth.”


Which economic system provides the most economic freedom from government control?


In which economic system are you likely to find greater differences in the income of its citizens?
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.


Which of the following does not require the economy to grow?
economic equity
increased number of jobs
growing population
higher standard of living


In order for an economy to grow
it must  maintain current ways of doing things
it must be willing to change even if some current industries must die
it must use computers and networks
it must preserve peoples jobs


Which statement is true?
Achieving economic goals involves economic trade-offs
Environmentalism is a win win economic goal without costs
You can achieve an economic goal without harming other goals
If a society prioritizes its goals it can avoid economic trade-offs.
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.  



Which statement is not true of traditional economies?
they embrace technology and change
they stress equality over growth
they preserve old ways of doing things
there are usually clearly defined gender roles
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
—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.

nar013-2.jpgCommand Economy
National Socialism


What is another name for market economies?
command economies
traditional economies


Why are centrally planned economies called “command economies?”
the people make all of the economic decisions with the purchases that they make
economic decisions are made by “commanders” appointed by the president
the market commands the economy
all economic decisions are commands from the central government


In a most mixed economies, what role does the government play.
imperialist role
command role
limited role
no role
economic freedom
other issues
economic security and predictability
Economic efficiency
economic equity
economic growth and innovation


The economy needs to be in a constant state of growth brought about by innovation, science and creativity


Your society has an abundance of oil and you believe that the society should extract as much as possible to make the society wealthy


The main goal of society should be to make sure that all citizens have equal income


The economy needs to be productive, stable and provide social security and medicare to those who need support


Individuals and businesses should be free of government regulation so they can be as productive as possible.


social issues such as “global warming” and “abortion” should be the primary goal of the economy
safety net
economic system
factor payments
standard of living


level of economic prosperity


the method used by a society to produce and distribute goods and services


the love of one’s country; the passion that inspires a person to serve his or her country


the income people receive for supplying factors of production, such as land, labor, or capital


government programs that protect people experiencing unfavorable economic conditions
traditional economy
market economy
centrally planned
command economy
mixed economy


economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets


economic system in which a central authority is in command of the economy; a centrally planned economy


economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services


market-based economic system with limited government involvement


economic system in which the central government makes all decisions on the production and consumption of goods and services

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