Tuesday, March 17 Welcome back! Happy St. Patrick’s Day! Bellringer: What is the difference between trade-offs and opportunity costs? Give an example.

Tuesday, March 17

• Welcome back! Happy St. Patrick’s Day!

• Bellringer:• What is the difference

between trade-offs and opportunity costs? Give an example.

Making decisions

• Trade-off: an alternative that we sacrifice when we make a decision– Cost-benefit analysis: What benefit am I getting

for the cost?• Opportunity cost: the most desirable

alternative given up as the result of a decision

Economic systems

• Remember the main problem in economics?

SCARCITY

UNLIMITED WANTS

LIMITED RESOURCES

CHOICES

Three basic questions that all economic

systems must answerWHAT?

FOR WHOM?

HOW?

Main problem in economics

Economic systems

• Remember the main problem in economics?– SCARCITY: Limited resources, unlimited wants

• Scarcity forces societies and nations to answer some hard economic questions

• People with different values came up with different solutions based on those values

• Economic system: The method used by a society to produce and distribute goods and services

SCARCITY

UNLIMITED WANTS

LIMITED RESOURCES

CHOICES

Three basic questions that all economic

systems must answerWHAT?

FOR WHOM?

HOW?

Main problem in economics

Economic systems

• The three key economic questions every society must answer:– WHAT goods and services should be produced?

• National defense• Education• Public health and welfare• Consumer goodsRemember: Each decision comes at an opportunity

cost!

Economic systems

• The three key economic questions every society must answer:– HOW should those goods and services be

produced?• Electricity: Oil? Solar power? Nuclear power?• Education: Class sizes of 20 or 50?• Food: Large corporate farms or small family farms?Countless possible combinations of land, labor,

and capital

Economic systems

• The three key economic questions every society must answer:– WHO consumes these goods and services?

• How do we distribute the available goods and services?

• Who gets to consume which goods and services?• Factor payments: the income people receive for

supplying factors of production, such as land, labor, or capital

Economic goals and societal values

• As they answer these three key questions, societies pursue some economic goals at the expense of others

• In doing so, they signal what they value

Economic goals

Economic efficiency

Economic freedom

Economic security and predictability

Economic equity

Economic growth and innovation

Other goals

Economic goals

• Economic efficiency– Making the most of resources

• Economic freedom– Freedom from government intervention in the

production and distribution of goods and services– How free are you to choose to produce, purchase,

and possess certain items?

Economic goals

• 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 in times of economic disaster

• Safety net: government programs that protect people experiencing unfavorable economic conditions, like injury, layoffs, natural disasters, etc. Example:

Economic goals

• Economic equity– Fair distribution of wealth– What is “fair”?– Should everyone get the same amount, or should

consumption depend on production?– How much should society provide for people who

are unwilling or unable to produce?– Equal pay for equal work sounds good, but …

• Police officers vs. lawyers?• Teachers vs. soldiers?

Economic goals

• Economic growth and innovation– A nation’s economy must grow for that nation to

improve its standard of living, or level of economic prosperity!

– Innovation – new products or ideas – is key to this process!

Economic goals

• Other goals– Societies may value other goals, too:

• Environmental protection• Full employment• Universal medical careThey can incorporate these other goals, but

only with some kind of economic trade-off!

Four types of economic systems

• Traditional economy: economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services– Family-based, work divided along gender lines– Small, close communities– Vulnerable to environmental disaster– Slow to adopt new technology– Most lack modern conveniences and have a low

standard of living

Four types of economic systems

• Market economy: Economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets– Decisions are made by individuals– Individuals choices determine what gets made,

how it’s made, and who consumes what’s made– Also called free markets, or capitalism

Four types of economic systems

• Centrally planned economy: economic system in which the central government makes all decisions on the production and consumption of goods and services– Command economy: economic system in which a

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

(They basically mean the same thing)

Four types of economic systems

• Mixed economy: A market-based economic system with limited government involvement– Most modern economies are mixed economies