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Basic Economic Questions:
1. Which goods and services should be produced?
2. How should the goods and services be produced?
3. For whom should the goods and services be produced?
Types of Economies
Traditional Economy

Traditions and rituals answer
basic economic questions

What? – Little choice as to
what to produce

How? – Bound by tradition,
follow earlier generations

For Whom?- Tradition
regulates who buys and sells,
and where
Market Economy
 Individuals and businesses
own means of production
 No gov’t involvement in
economic decisions
 What?- Consumers decide
what should be produced
through purchases
 How?- Businesses decide
how to produce G&S
 Businesses must be
competitive & produce
quality products at lower
prices
 For Whom?- People who
have more money can buy
more G&S
 People are motivated to
work more
Command Economy
Mixed Economy
 Gov’t makes economic
decisions
 No economy is purely
traditional, market, or
command
 What?- One person
(dictator) or group of gov’t
officials decide on what
products are needed based
on what they believe is
important
 How?- Gov’t owns all
means of production, it runs
all businesses
 Controls employment and
worker benefits
 U.S. is a mixed economy
leaning toward a market
economy
 Gov’t sets laws and
regulations that businesses
must follow
 For Whom?- Gov’t decides
who will receive what is
produced
 Wealth is shared equally
among all people to ensure
everyone’s basic needs are
met
Political Philosophies That Shape Economies
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Capitalism
Communism
Characterized by competition in the
marketplace and private ownership of
business
Gov’t concerned about its people and
cares for those who cannot care for
themselves
 Authoritarian, gov’t controls the factors
of production
 No private ownership of property or
capital
 Goods owned by gov’t are available to
all as needed
 Society is classless
Typically a democratic political system 
Power should be in the hands of the
people

Usually more than one political party


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
Examples
 U.S.
 Japan
All people able to work are assigned
jobs
Theoretically, there is no unemployment
People get paid whether they go to work
or not
Gov’t decides on schooling and where
people live
Medicare is free
No financial incentive for people to
increase productivity
Examples
 Cuba
 China
 North Korea
Socialism
 Referred to a system on its way to the
communist ideal of a classless society
 Typically a democratic political system
 Increased amount of gov’t involvement
in economy
 Main goal- meet basic needs for all and
provide full employment
 More social services to ensure a certain
standard of living to everyone
 Medicare is free or low cost
 Edu is low cost
 Pension systems and elderly care
 Businesses and individuals pay much
higher taxes than capitalists countries
 Gov’t runs all key industries and makes
economic decisions
 State-controlled, noncompetitive
companies
Examples
 Canada
 Sweden
 Germany
GOALS OF A SUCCESSFUL ECONOMY:
1. INCREASE PRODUCTIVITY
2. DECREASE UNEMPLOYMENT
3. MAINTAIN STABLE PRICES
Economic Measurements
Labor Productivity
Gross Domestic
Product (GDP)

Output per worker hour
that is measured over a
defined period of time


Increasing productivity:
 Invest in new
equipment or facilities
 Provide training and
financial incentives
 Reduce workforce and
increase
responsibilities
 Specialization and
division of labor


Output of G&S
produced by labor and
property located
within a country
GDP made up of
private investment,
gov’t spending,
personal spending, net
exports of G&S, and
change in business
inventories
Inflation Rate
 Rise in prices
 CPI
 PPI
Unemployment
Rate
 Jobless rate
 Low inflation rate (1-  The higher the
5%) means stable
unemployment
economy
rate, the greater
the chances of an
 Double digit rate
economic
devastates economy
slowdown
 As inflation increases,

The lower the rate,
money looses its value
the greater the
 Controlling inflation
chances of an
is one of gov’ts main
expansion
goals
 When inflation is
increasing, gov’t
raises interest
rates to discourage
borrowing
 This slows the
economy and
brings inflation
down
Standard of Living

Measurement of the
amount and quality of
G&S and services a
nation has.
 Calculate standard of
living by dividing the
GDP by its population to
get the per capita GDP
THE BUSINESS CYCLE
Expansion
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Recession
 Period of economic
slowdown that lasts for at
least two quarters
Unemployment is low
 Economy slows
Consumer confidence and
 Businesses lay off workers
spending is high
 Consumer confidence and
spending is low
Increase in the output of
G&S
 Little demand causes
production of G&S to
Businesses prosper and
invest in new product
decrease
development and R&D
 Businesses have little
money to invest
A peak marks the end of the
phase and the beginning a
 Depression is a prolonged
recession
and deep recession
Time when economy is
flourishing
Trough
Recovery
 Lowest point in economic
activity

Period of renewed
economic growth
 Marks the transition from
recession to recovery
 Economy stops slowing
 May show signs that a
recovery is near



GDP begins to increase
Business picks up
People find jobs and begin
to spend
Unemployment is reduced
Moderate expansion of
business

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FACTORS THAT AFFECT BUSINESS CYCLES
Business


Expansion
 Expand during recovery or
expansion
 Invest in new properties,
equipment, and inventories during
expansion
 Hire more employees during an
expansion
Recession
 Curtail operations during recession
 Cut employees first during a
recession
 Cut back on inventories to match
lower demand
Consumers
Government
 Expansion/recovery
 Influence business cycles with policies
and programs
 More optimistic

Taxation
 Spend more on material goods and
luxury items
 Raise taxes—businesses and
consumer have less to spend
 Consumer spending accounts for 2/3
of GDP
 To boost the economy:
 Recession
 Reduce interest rates
 Fear of losing their jobs
 Cut taxes
 Fear of decrease in wages
 Federally funded programs
 Causes a loss in consumer
 When economy worsens:
confidence
 Fed Reserve lowers interest rates to
encourage business and consumer
 Reduced spending causes businesses
to reduce operations
spending
 Raise interest rates if inflation is a
problem to discourage buying on
credit