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ECONOMICS Scarcity A word economists use to describe the conflict between people’s desires and limited resources. The foundation for all economics. Economic systems • Describes how a country’s economy is organized • Every country, rich or poor, has an economic system • Every country has a scarcity of productive resources (natural resources, labor resources, and capital resources) • Need an economic system to determine how to use their productive resources Three basic questions All economic systems must answer 3 basic questions: 1. What to produce? 2. How to produce? 3. For whom to produce? Economic Systems Market System – Citizens and businesses make most economic decisions. Government plays a limited role. Ex. U.S., Canada, Mexico, U.K. Command System – Government decides how many of which goods are produced and sets the price. Ex. Communist governments (North Korea and Cuba). Economic Systems cont. Traditional System – social roles and culture determine how goods and services are produced, what prices and individual incomes are, and which consumers are allowed to buy certain goods. Ex. Family’s status may determine whether they can own a tractor. Mixed economy No country has a pure economic system Most are mixed economies, although they are closer to one type of economic system than another Economic Systems Pure Command Pure Market United Kingdom 79% Russia 51% Pure Command Germany 71% Pure Market Gross Domestic Product GDP – gross domestic product – tells the total value of the goods and services that a country produces each year. This is one way to measure a country’s economy. https://www.cia.gov/library/publications/the -world-factbook/rankorder/2004rank.html Four Factors of Production Natural Resources – raw materials such as land, water, forests, and minerals. Labor Resources – workers with skills and experience to make goods or provide services. Capital Resources – machines, factories, and supplies Entrepreneurs – People who bring natural resources, labor resources, and capital resources together to produce goods and services. Factors of Production for a Music CD Entrepreneur (owner of recording studio and factory) Labor Resources (musicians, sound technicians, producer, factory manager, factory workers) Natural Resources (materials to manufacture CDs) Music CD Capital Resources (recording equipment, studio, factory and manufacturing equipment) What to produce? How to produce? For whom to produce? United Kingdom Largely service based – also agriculture Industries have much freedom Private sector produces goods and services for domestic and international markets Germany Primarily exportbased; manufacturing Largely private businesses – increasing amount of government involvement (E Germany still behind) Exports for global markets, W Germany still sends billions of dollars to E Germany to help them catch up Russia Russian govt is still largely involved and has to approve some deals Difficult to make large scale changes; modernization is slow in agriculture and factories Low tax rates but high tariffs and minimal prot