ECONOMICS TOPIC 2 LESSON 1

ECONOMICS TOPIC 2 LESSON 1

THE THREE BASIC ECONOMIC QUESTIONS

ESSENTIAL QUESTION

Who benefits from the free market economy?

OBJECTIVES

Identify the three basic economic questions that all societies must answer.

Describe the economic goals that determine how a society answers the three economic questions.

Define the characteristics of a traditional economy.

Three Basic Economic Questions

What goods and services should be produced?

How should these goods and services be produced?

Who consumes these goods and services?

Three Basic Economic Questions

An economic system is the structure of methods and principles a society uses to produce and distribute goods and services.

What Goods and Services Should Be Produced?

Every society must decide what to produce in order to satisfy society’s needs and wants. 

How Should Goods and Services Be Produced?

A society must also decide how to produce goods and services. 

Open Ended

In the United States, transactions like the one shown here help determine what goods and services are produced, how they are produced, and who consumes them. Describe How is this transaction helping to answer the three basic economic questions?

Who Consumes the Goods and Services That Are Produced?

Societies also make decisions that determine how goods and services are consumed. 

Who Consumes the Goods and Services That Are Produced?

The answers to such questions are largely determined by how societies distribute income. Factor payments are the income people receive in return for supplying factors of production—land, labor, or capital. 

Open Ended

This illustration shows two different approaches to the question of how to combine the factors of production. Analyze Information Which approach is most efficient? Explain your answer.

Who Consumes the Goods and Services That Are Produced?

 Profit is the amount of money a business receives in excess of its expenses. Profits are the rewards entrepreneurs receive for taking the risk of starting a business.

Multiple Choice

Check Understanding How is a society’s economic system defined?

• by how it answers the three basic economic questions

• by the decisions it makes about who consumes goods and services services

• by the resources it uses to produce goods and services

• by the trade-offs it accepts in order to produce goods and SERVICES

Economic Goals of Society

Efficiency

Because resources are always scarce, societies try to maximize what they can produce using the resources they have.

Economic Goals of Society

Freedom

Most people value the opportunity to make their own choices. Still, people all over the world face limits to their economic freedom.

Economic Goals of Society

Security

Most people do not like uncertainty. We want to know we can get milk or bread every time we go to the store. We want the security of knowing we will get our paychecks every payday. Ideally, economic systems seek to reassure people that goods and services will be available when needed and that expected payments will arrive on time.

Economic Goals of Society

We also want the security of knowing that help is available if we are in need. Many governments provide a safety net, or set of programs to protect people who face unfavorable economic conditions such as layoffs, injuries, or natural disasters.

Open Ended

Household income rose between 1976 and 2011 at all five income levels—but not at equal rates. Analyze Graphs Which income group saw the greatest change?

Economic Goals of Society

Equity

Equity, or fairness, is another economic goal that is defined differently in different societies.

Economic Goals of Society

Growth

A nation’s economy must grow with its population so it can provide jobs for the new people joining the workforce. A nation’s economy must grow if people are going to have more income. When that occurs, the nation improves its standard of living, or level of economic prosperity.

Economic Goals of Society

Innovation plays a huge role in economic growth. Innovation is the process of bringing new methods, products, or ideas into use. During the Industrial Revolution of the 1700s and 1800s, innovations in technology increased the efficiency of production and introduced new goods and services.

Economic Goals of Society

Conflicting Economic Goals

A society may value goals other than these. Environmental protection, full employment, or protecting national industries may be among a nation’s chief economic goals.

Sometimes, economic goals conflict with one another.

Multiple Choice

Distinguish Which economic goal reflects the desire of individuals to make their own choices about owning property or becoming entrepreneurs?

• efficiency

• freedom

• security

• equity

Traditional Economies

The oldest and simplest of economic systems is the traditional economy. A traditional economy relies on habit, custom, or ritual to answer the three basic economic questions. There is little room for innovation or change.

Open Ended

Who benefits from the free market economy?