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Chapter 2 Economic Resources and Systems Section 2.2 Economic Systems Click here to advance to the next slide. Read to Learn Describe the three basic economic questions each country must answer to make decisions about using their resources. Contrast the way a market economy and a command economy answer the three economic questions. Key Concepts The Main Idea Scarcity of economic resources forces every country to develop an economic system that determines how resources will be used. Each economic system has its advantages and disadvantages. Key Terms Basic Economic Questions Different Types of Economies economics the study of how individuals and groups of individuals strive to satisfy their needs and wants by making choices 1 Key Terms Key Terms economic systems the methods societies use to distribute resources price the amount of money given or asked for when goods and services are bought or sold market economy an economic system in which economic decisions are made in the marketplace supply the amount of goods and services that producers will provide at various prices Key Terms Key Terms demand the amount or quantity of goods and services that consumers are willing to buy at various prices command economy an economic system in which a central authority makes the key economic decisions equilibrium price the point at which the quantity demanded and the quantity supplied meet mixed economy an economy that contains both private and public enterprises Basic Economic Questions There are three basic Economic questions. economics the study of how individuals and groups of individuals strive to satisfy their needs and wants by making choices Basic Economic Questions What should be produced? How should it be produced? Deciding to use a resource for one purpose means giving up the opportunity to use it for something else. The methods and labor used as well as the quality of items produced are important factors. Who should share in what is produced? In most societies, people can have as many goods and services as they can afford to buy. This is called opportunity cost. 2 Different Types of Economies Market Economies Different economic systems answer the three basic economic questions in different ways. A market economy can also be called a private enterprise system, the free enterprise system, or capitalism. economic systems the methods societies use to distribute resources Market Economies market economy an economic system in which economic decisions are made in the marketplace Market Economies Characteristics of a Market Economy Resources are privately owned Citizens can own their own homes, land, and businesses Business owners decide how their businesses will be run Business owners decide what to produce and sell Business owners decide what to charge Government works to promote free trade and prevent unfair trade practices Consumers choose their occupations and where to live There is an uneven distribution of income Market Economies There is a relationship between price, supply, and demand. The higher the price for goods or services, the less consumers will buy. price the amount of money given or asked for when goods and services are bought or sold The lower the price, the more consumers will buy. Market Economies supply the amount of goods and services that producers will provide at various prices demand the amount or quantity of goods and services that consumers are willing to buy at various prices Supply and demand interact with each other to form the equilibrium price. equilibrium price the point at which the quantity demanded and the quantity supplied meet 3 Figure 2.1 Supply, Demand, and Equilibrium Figure 2.1 Supply, Demand, and Equilibrium Figure 2.1 Supply, Demand, and Equilibrium Market Economies Competition among similar businesses is one of the basic characteristics of a free enterprise system. Profit motive is the desire to make a profit. Command Economies In a command economy, the government owns and controls all the resources and businesses. Command Economies Characteristics of a Command Economy command economy an economic system in which a central authority makes the key economic decisions The government dictates what will be produced, how it will be produced, and who will get the goods There is little choice of what to buy Goods are not considered necessities Prices are controlled by the state There is no competition and little incentive to produce a better product Highly skilled workers may earn the same as low-skilled workers 4 Command Economies Mixed Economies A moderate command economy is also known as socialism. Most nations have a mixed economy, which combines elements of capitalism and socialism. In a moderate command economy, there is some form of private enterprise, but the state owns major resources. 1. How does a market system decide what will be produced? A market system decides what is to be produced through supply and demand in the marketplace. mixed economy an economy that contains both private and public enterprises. 2. In a market system, what determines how many goods and services an individual can buy? It is through one’s income—mostly generated by working. End of Chapter 2 Economic Resources and Systems 3. Some nations can produce more goods with fewer workers than other countries that have more workers. How can that be true? Section 2.2 Economic Systems More technology is used in the country with fewer workers, increasing worker productivity. 5