Frayer Model / Economic Understandings Term Scarcity Economic system Traditional economy Command economy Quota Definition This is the limited supply of something Developed to determine how a country will use its limited resources & answer the 3 basic economic questions 1) What goods & services will be produced? 2) How will goods and services be produced? 3) Who will consume the goods and services? The way a society answers these questions will determine its economic system. The customs & habits of the past are used to decide what and how goods will be produced, distributed, and consumed. What ever position one is born into he/she will likely continue in that role since jobs are handed down from generation to generation. The government makes basic economic decisions. Individuals & corporations generally do not own business or farms; these are owned by the government. Workers are told what to produce & how much to produce in a given time. When a worker or corporation is told how much to produce in a given period of time this is called a quota. Free enterprise Decisions are guided by changes in prices that occur between individual buyers & sellers in the market place. In a market economy individuals or corporations generally own businesses and farms. Each business or farm decides what it wants to produce. Another name for Market economy Capitalism Another name for Market economy Laissez-faire Another name for Market economy Law of Supply & Demand The law of supply & demand determines the price people pay for things. Supply Supply is the amount of goods available Demand Demand is how many consumers want the goods. Market economy Sentence Example Free economy The U.K. has a market economy and is considered one of the freest economies in Europe. Mixed economy Since there are no pure command or market economies. All modern economies have characteristics of both systems and are then considered to be Mixed economies. When countries try to limit trade with other countries they will create trade barriers by adding taxes (tariffs) or (quotas) taxes Trade barriers Tariffs Embargo Free trade zone Currency Gross Domestic Product (GDP) Standard of living Human capital Physical capital Entrepreneur An embargo is a government order stopping trade with another country. It might be put into place to put pressure on another country for various reasons. When there are no trade barriers between countries. The European Union has a free trade zone among member countries. This is the money people use to make trade easier. The U.S. uses $dollars, Russia uses rubles etc. The GDP of a country is the total value of all the goods and services produced in a country in one year. This helps determine how rich or poor a country is. The economic level in which people live To increase the GDP, countries must invest in human capital. This means improving peoples economic level by making education available, training, skills, and health care of the workers in a business or country. This would be investments needed to operate machinery, technologies, buildings, and property needed by a business to operate. The person who provides the money to start and own a business is called an entrepreneur. They take risks with their own money and time because they believe their business ideas will make a profit.