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Understanding Economic Systems: Addressing Scarcity and Basic Economic Questions

This chapter explores how scarcity forces societies to choose economic systems for goods and services production. It identifies three fundamental economic questions: What to produce? How to produce? And who consumes? The interplay of land, labor, and capital shapes these responses, as societies weigh efficiency, economic freedom, and equity. Through examples such as the allocation of resources in education and agriculture, and the impact of technology, the chapter reveals how different societies answer these questions while striving to achieve their economic goals, including growth and innovation.

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Understanding Economic Systems: Addressing Scarcity and Basic Economic Questions

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  1. Chapter 2 Answering the 3 Basic Economic Questions

  2. Systems • Because of scarcity- societies choose a system • Economic system- method used to produce and distribute goods/services • 3 basic questions must be answered • 1. What goods/services should be produced • 2. How should goods/services be produced • 3. Who consumes goods/services.

  3. What • Must meet need and wants. • “Guns vs Butter “ questions- allocation • Defense • Education • Welfare • Consumer goods • Ultimately- opportunity costs

  4. How • How to use resources- • Producing Energy- oil, solar, nuclear? • Teaching- 20 or 50 students to a class • Agriculture- Large corporate farms or small family farms • LAND/LABOR/CAPITAL all figured into decision • Figure 2.1 illustrates- efficiency/best way • Technology impact?

  5. WHO • U.S. produces many, many goods and services • Remember quantities/resources are not unlimited. • How are things divide up or allocated? • Usually by distribution of income in a society. • FACTOR PAYMENTS- income received by providing land, labor, capital or entrepreneurship

  6. WHO • Landowners receive rent • Workers receive wages • Banks/institutions lend $ collect interest • Entrepreneurs profit off their business • Rent? Minimum wage? Distribution/allocation of goods resources determined by each society • Based- social values and goals to that society

  7. Economic Goals & Social Values • Different societies answer the 3 basic questions differently • All try to achieve broad economic goals • 1. Efficiency-making most of resources • 2. Economic Freedom- govt regulation- freedom of choice • 3. Economic Security – safety net • 4. Predictability – knowledge that future will be okay • 5. Economic Equity-fair distribution of wealth • 6. Economic Growth – growing workforce and employment • 7. Innovation- increase standard of living for people

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