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What is an Economy?
? An economy, or
economic system, is the
way a nation makes
economic choices about
how the nation will use its
resources to produce and
distribute goods and
services.
2

Resources
? Also called factors of production, are
all the things used in producing goods
and services. They fall into four
categories:
1. Land
2. Labor
3. Capital
4. Entrepreneurship
3

? Land refers to everything on Earth that is in its natural
state, or Earth's natural resources.
? Labor refers to all the people who work in the
economy.
? Capital includes money needed to start and operate a
business. At a national
level, capital includes infrastructure, such as roads,
ports, sanitation facilities,
and utilities.
? Entrepreneurship refers to the skills of people who
are willing to risk their time and money to run a
business.
4

Scarcity
? The difference between wants and
needs and available resources.
? Example: Most underdeveloped
nations have natural resources, but do
not have capital or skilled labor to
develop them.
5

Choices
? Every day, in our country and countries
around the world, business owners,
consumers, workers, and governments
must make choices about using scarce
resources.
? Together these choices create an
economy.
? These choices fall into three groups:
6

Basic Economic Choices:
? WHAT goods and services should be
produced?
? HOW should the goods and services be
produced?
? WHO receives and consumes these
goods and services.
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Four Types of Economic
Systems:
? These questions are answered by the type
of economic system a nation has. There
are four types of economies:
1. Pure Market Economy
2. Pure Command Economy
3. Traditional Economy
4. Mixed Economy
Let��s review each of these types of economies.
8

Pure Market Economy
? NO government involvement in economic
decisions. Private firms account for all
production.
? Consumers decide WHAT should be
produced. They do this through the
purchases they make.
? Businesses determine HOW the products will
be produced. They must be competitive.
? WHO buys the products? The people with the
most money are able to buy more goods and
services.
9

Problems
? Difficulty enforcing property
rights - no laws.
? Some people have few resources to sell -
no minimum income.
? Some firms try to monopolize markets -
conspiring and price fixing.
? No public goods. - national defense?
10

Pure Command Economy
? All resources are government-owned.
? One person (dictator) or a group of officials
decide WHAT products are needed.
? The government runs all businesses, controls
all employment, and decides HOW goods and
services will be produced.
? The government decides WHO receives the
products that are produced.
11

Problems
? Consumers get low priority.
? Little freedom of choice �C few
products.
? Resources owned by the state
are often wasted �C individuals
don��t care if they don��t own it.
12

Traditional Economy
? Economy is shaped largely by custom or
religion.
? Customs and religion determine the
WHO, WHAT, and HOW.
? Example: India has a caste system which
restricts occupational choice. (A social
class separated from others by
distinctions of hereditary rank, profession,
or wealth.)
13

Mixed Economy
? Most economies in the world today are
mixed.
? Classification is based on how much
government intervention there is.
? In the U.S. the government accounts for
about 1/3 of all U.S. economic activity.
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Example of Economies��
Pure
Market
Economy
Pure
Command
Economy
U.S.
Mexico
Swede
n
Russia
Mainland
China
North
Korea
15

Government Philosophies
? Countries also have different
philosophies of government which
reflect not only the laws and rules, but
how individuals are treated.
? There are three political philosophies:
1. Capitalism
2. Socialism
3. Communism
16

Capitalism
? Capitalism features private
ownership of businesses and
marketplace competition.
? It is the same as a free enterprise
system.
? The political system most frequently
associated with capitalism is
democracy.
17

Socialism
? The main goal of socialism is to keep
prices low for all people and to provide
employment for many.
? The government runs key industries,
generally in telecommunications, mining,
transportation, and banking.
? Socialist countries tend to have more
social services.
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Communism
? Have a totalitarian form of government; this
means that the government runs
everything and makes all decisions.
? Theoretically, there is no unemployment in
communist countries.
? The government decides the type of
schooling people will receive and also tells
them where to live.
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Economies in Transition
? Many countries are in transition from either
communism or socialism to capitalism.
? Privatization is a common aspect of
transition from a command economy to
free enterprise system. Privatization means
state-owned industries are sold to private
individuals
and companies.
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Do you think the oil industry is a monopoly?
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