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Answering the ThreeEconomic Questions

Objectives You may wish to callstudents’ attention to the objectivesin the Section Preview. The objec-tives are reflected in the main head-ings of the section.

Bellringer Display the followingterms: producer, product, market,and consumer. Ask students to defineeach term and give related examplesfor each term. Explain that in thissection they will learn how thesefour forces interact in different eco-nomic systems.

Vocabulary Builder Have studentswrite the key terms for Section 1 intheir Economics Journals. As theyencounter each term in the text andlearn its meaning, have them add thedefinition, a brief example, and a sim-ple illustration.

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Economic Systems To build understanding of theconcept of economic systems, have students use atree map graphic organizer like the one at theright. Students should place the label “EconomicSystems” in the top box, the labels“Traditional,” “Market,” “Centrally Planned,”and “Mixed” in the next row of boxes, anddetails about each type of economy in the rowbelow.

Section Reading Support Transparencies A tem-plate and the answers for this graphic organizercan be found in Chapter 2, Section 1 of the SectionReading Support Transparency System.

Graphing the Main IdeaB U I L D I NGB U I L D I NG

K E Y CONCE PTSK E Y CONCE PTS

ChaptChapter er 22 •• Section Section 11

Guided Reading and ReviewUnit 1 folder, p. 13 asks students toidentify the main ideas of the sectionand to define or identify key terms.

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IIn Chapter 1, you read about theeconomic concept of scarcity—that we

cannot have all that we want or need.Indeed, in some places in the world, peoplecannot even meet their basic needs forfood, clothing, and shelter because theirresources are too scarce. Scarcity forcessocieties and nations to answer some hardeconomic questions. Different economicsystems have evolved in response to theproblem of scarcity. An economic system isthe method used by a society to produceand distribute goods and services. Whicheconomic system a society employsdepends on that society’s goals and values.

Three Key EconomicQuestionsBecause economic resources are limited,every society must answer three keyeconomic questions:

• What goods and services should beproduced?

• How should these goods and services beproduced?

• Who consumes these goods and services?

What Goods and Services Should Be Produced?Each society must decide what to producein order to satisfy its needs and wants. Intoday’s complex societies, it is often difficultto distinguish between needs and wants.While it may be obvious that we need foodand shelter, modern societies face addi-tional important considerations. Howmuch of our resources should we devote tonational defense, education, public healthand welfare, or consumer goods? Whichconsumer goods should we produce?

Recall the guns-and-butter trade-offdescribed in Chapter 1. Because of ourlimited resources, each production decisionthat a society makes comes at an opportu-nity cost.

How Should Goods and Services Be Produced?The next question we face is how to useour resources to produce goods andservices. For example, should we produceelectricity with oil, solar power, or nuclearpower? Should teachers have classes of 20students or 50 students? Should weproduce food on large corporate farms oron small family farms?

economic system themethod used by asociety to produce anddistribute goods andservices

Answering the ThreeEconomic Questions

Preview ObjectivesAfter studying this section you will be able to:1. Identify the three key economic questions

of what to produce, how to produce, andwho consumes what is produced.

2. Analyze the societal values that determinehow a country answers the three economicquestions.

3. Explain the characteristics of traditional,command, and market economies anddescribe the societal values that influencethem.

Section FocusAll societies must answer three keyeconomic questions about theproduction and consumption ofgoods and services. How a societyanswers these questions depends onhow much it values differenteconomic goals. Four differenteconomic systems have developedin response to these three questions.

Key Termseconomic systemfactor paymentspatriotismsafety netstandard of livingtraditional economymarket economycentrally planned

economycommand economymixed economy

Lesson PlanTeaching the Main Concepts

1. Focus Tell students that each of themplays a vital role in the nation’s econ-omy. Ask them what roles they thinkthey play.2. Instruct Discuss with students whatthey know about different economies.Explain that all human societies mustanswer the three key economic ques-tions. Describe the various economicsystems. Lead students to understandthat although they are learning aboutdistinct economic systems, most coun-tries operate under a mix of systems.3. Close/Reteach Have each studentresearch the economy of a differentcountry. Then have the class compile achart showing which type of economyeach country uses to illustrate that mosteconomies today are mixed economies.

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Government One of the key concepts in this sec-tion is the notion of a safety net, a set of govern-ment programs to protect people in unfavorableeconomic conditions. Students may think thatthis applies only to those who are poor or unem-ployed. Stress that the various safety nets pro-vided by the government are meant to help all

citizens—poor, middle-class, or wealthy—intimes of crisis. Ask students to create a list ofsafety net programs offered by the government.Tell them to be sure to include programs thatoperate during both good times and bad, such as Social Security.

Econ 101: Key Concepts Made EasyEcon 101: Key Concepts Made Easy$

Remind students that toward the endof the twentieth century, salariessoared for the top executives of majorcorporations, with some executivesearning more in a year than many oftheir employees would earn in a life-time. Ask, “Why do you think factorpayments vary so widely? Should stan-dards be adopted, and if so, whoshould determine them?” GT

Transparency Resource PackageEconomics Concepts, 2A: Three

Key Economic Questions

Have students cut out photos of saleitems from newspapers or magazines.The items should range widely in pricefrom houses and cars to food items.Divide the photos and place them ontwo tables. Then randomly give eachperson in half the class an “income”note ranging from $100,000 down to$50. Allow these students one-at-a-time to come to the table and “pur-chase” as much as they can,(estimating values) Then invite theother students to come to the tableone-at-a-time and distribute the itemsas equally as possible, after removingthree or four of the most expensive forthe teacher. Explain the differencebetween a free market and commandsystem. SN

Answer to . . .Building Key Concepts Farmingwith hand tools comes with theopportunity cost of higher yieldsand more workers available forother tasks. Farming with modernequipment comes with the cost ofjobs, pollution generated bymachinery, and money spent onmachinery instead of on othergoods or services.


Although there are countless ways tocreate all of the things we want and need,all require land, labor, and capital. Thesefactors of production can be combined indifferent ways. For example, examine thechart above (Figure 2.1). Before the intro-duction of modern farming equipment, atypical combination of resources forproducing 15 bushels of wheat was 56hours of labor, 1 acre of land, and simplehand tools. With today’s mechanicalfarming equipment, farming is much moreefficient. Forty bushels of wheat can beharvested from one acre of land with just2.9 worker-hours of labor.

Who Consumes Goods and Services?In recent years, the top 25 goods manufac-turers in the United States have launchedan average of 13 new products each day.Retail stores, which 50 years ago typicallycarried about 3,000 items, now offerabout 30,000 different products. Americanfarms produce 315 million metric tons ofwheat, rice, and corn and maintain about180 million head of livestock. Despite thisstaggering output, quantities are notunlimited.

How does this abundance get dividedup? Who gets to drive a new luxury car andwho can only afford a subway pass? Whoattends a concert and who stays home?Who eats a well-balanced diet and whoeats nothing but hot dogs for every meal?Who gets access to a good education?Societies must decide how to distribute theavailable goods and services.

The answer to the question of distribu-tion is determined by how societies chooseto distribute income. Factor payments arethe income people receive for supplyingfactors of production—land, labor, capital,or entrepreneurship. Landowners receiverent, workers receive wages, and thosewho lend money to build factories or buymachinery receive payments calledinterest. Entrepreneurs earn profits if theirenterprises succeed.

How much should we pay the owners ofthe factors of production? How do wedecide how much a particular piece of landis worth, how much teachers should earnversus how much doctors should earn, orwhat the interest rate should be?

The question of who gets to consumewhich goods and services lies at the very

Hand tools

Modern mechanical equipment

1 acre of land + 2.9 worker-hours + capital = 40 bushels of wheat

1 acre of land + 56 worker-hours + capital = 15 bushels of wheat

Figure 2.1 Combining Factor ResourcesFigure 2.1 Combining Factor Resources

factor payments theincome people receivefor supplying factors ofproduction, such asland, labor, or capital

Today, capital–notlabor–dominates the

answer to how wheatis produced.

Opportunity CostIdentify the

opportunity costs ofeach method of

farming.

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Consider these suggestions to take advantage ofextended class time:

� Extend the Vocabulary Builder on p. 23 byhaving students write each of their definitionsor examples of the key terms on a differentpiece of paper. Have students form teams for a quiz show; let them take turns identifyingwhich key term each definition or example represents.

� Extend the Focus portion of the Lesson Planon p. 23 by asking students to create a chartshowing all the roles they play in the economy asproducers and consumers. Ask students to usespecific examples from their everyday lives.

� Have pairs of students work through the casestudy on Berry Gordy and complete the FreeEnterprise Activity in the Case Studies in FreeEnterprise folder, pp. 4–5. Ask small groups to pre-sent brief marketing plans based on their research.

Block Scheduling StrategiesBlock Scheduling Strategies

Transparency Resource PackageEconomics Concepts, 2B:

Economic Goals

Ask students to create posters thatexplain the three key economic ques-tions and the basic economic goalspresented in Section 1. Postersshould include both words and illus-trations to clarify concept.

Ask students to write a sentence thatsummarizes the content under eachsubhead in Section 1. (For “EconomicEfficiency” students might write:“Societies strive for efficiency; they tryto maximize what they can get for theresources they have.”) LPR

Answer to . . .Building Key Concepts The goals ofefficiency and economic securityand predictability would help most.

BackgroundConsumer PreferencesConsumer PreferencesStatistics on the sales of recordedmusic in recent years reflect con-sumers’ increasing preference forcompact discs (CDs) over cassettes.For example, 46.5 percent of allrecorded music sold in 1992 was inthe form of CDs, followed by cas-settes at 43.6 percent. Five yearslater, in 1997, CDs made up 70.2 per-cent of all recorded music sold,whereas cassettes made up only18.2 percent. By 2002 the sale of CDshad risen to 90.5 percent. Cassettesales, on the other hand, haddropped to a mere 2.4 percent.


heart of the differences between economicsystems today. Each society answers thequestion of distribution based on its uniquecombination of social values and goals.

Economic Goals and SocietalValuesDifferent societies answer the threeeconomic questions based on the impor-tance they attach to various economicgoals. Figure 2.2 lists some generaleconomic goals that most economicsystems try to address. Bear in mind thatsocieties pursue each of these goals, tosome degree, at the expense of the others.

Economic EfficiencyBecause resources are always scarce—thatis, they always involve an opportunitycost—most societies try to maximize whatthey can get for the resources they have towork with. If a society can accurately assesswhat to produce, it increases its economicefficiency. A manufacturer would bewasting resources producing record albumsif people prefer to buy CDs. Knowing thebest way to produce a product cuts waste,too. Of course, in the end, products need toreach consumers. An economy that can’tdeliver goods isn’t efficient.

Economic FreedomMost of us value the opportunity to makeour own choices. How do you feel aboutlaws that keep you from earning anincome? What about laws that forbid youto make certain purchases or possesscertain items? The economic systems ofdifferent nations allow different degrees ofeconomic freedoms. In general, however,people all over the world face limitationson economic freedom.

In the United States, the economicfreedoms that we as Americans enjoy arean important reason for our patriotism.Patriotism is the love of one’s country—thepassion that inspires a person to serve hisor her country, either in defending it frominvasion or protecting its rights and main-taining its laws and institutions. Thefreedoms that allow any American who sochooses to become an entrepreneur, forexample, are continuing sources of prideand patriotism.

Economic Security and PredictabilityMost people don’t like uncertainty. Wewant to know that we can get milk andbread every time we go to the grocery store,or that the gas pumps will be full when we

Economic efficiency Making the most of resources

Economic freedom Freedom from government intervention in the production and distribution of goods and services

Economic securityand predictability

Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster

Economic equity Fair distribution of wealth

Economic growthand innovation

Innovation leads to economic growth, and economic growth leads to a higher standard of living.

Other goals Societies pursue additional goals, such as environmental protection.

Figure 2.2 Economic GoalsFigure 2.2 Economic Goals

This family (left) will need to rebuild theirhome after a devastating hurricane. Government Which economic goal couldhelp them recover from the storm?

patriotism the love ofone’s country; thepassion that inspires aperson to serve his orher country

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Ask students to identify the four eco-nomic systems presented in Section 1.Then have each student write an essaydetailing the similarities and differ-ences between any two of the systems.

Transparency Resource PackageEconomics Concepts, 2C:

Comparing Economic Systems

Economic CartoonUnit 1 folder, p. 25 gives students practice in interpreting cartoons about section content.


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BackgroundEconomics in HistoryEconomics in HistoryThe Fair Labor Standards Act of 1938stipulated that certain workers had to be paid a minimum hourly wage,which was initially set at $0.25 anhour. Since then, the numbers andtypes of workers covered by this lawhave expanded, and the hourly mini-mum wage has steadily increased.However, in the late 1960s and early1970s, the purchasing power of theminimum wage began to decreasedue to inflation. For example, inFebruary 1968 the minimum wagewas raised to $1.60 an hour. In 1996dollars, the purchasing power of that$1.60 was $7.21. By January 1980 theminimum wage had risen to $3.10 anhour, but its purchasing power wasdown to $5.90. In April 1990 the mini-mum wage was $3.50, or $0.40 anhour higher, but its purchasing powerhad slid to $4.56.

Have students read the section titled “Economic Growth and Innovation” and thenanswer the question below.According to the text, which of the following is a benefit of economic growth?

A The standard of living improves.

B Nomadism declines.

C Economic equity is increased.

D The economy becomes more predictable.

Preparing for Standardized TestsPreparing for Standardized Tests��

Replace with revised SE page!go to gas up our cars. We want to feelconfident that we will get our paychecksevery payday. Ideally, economic systemsreassure people that goods and services willbe available when they need them and thatthey can count on receiving expectedpayments on time.

We also want the security of knowingthat help is available if we are elderly,poor, unemployed, or facing some otherpotential economic disadvantage. Mostpeople feel that the government shouldprovide some kind of safety net, or set ofgovernment programs that protect peopleexperiencing unfavorable economic condi-tions. These include injuries, layoffs,natural disasters, or severe shortages.Most countries also believe in providingsome sort of base income for retiredpersons to ensure that older people cansupport themselves after retirement.

Economic EquityEach society must decide the best way todivide its economic pie. What constitutes afair share? Should everyone get the same,or should one’s consumption depend onhow much one produces? How muchshould society provide for those who areunable or unwilling to produce?

Many people believe in equal pay forequal work, but society does not value alljobs equally. Most lawyers earn more thanmost nurses. Most computer programmers

earn more than most truck drivers. Noteveryone is able to work. How should weprovide for the ill and infirm?

Economic Growth and InnovationA nation’s economy must grow for a nationto improve its standard of living, or level ofeconomic prosperity. This is especially trueif a country’s population is growing. Theeconomy also must grow to provide newjobs and income for people.

Innovation plays a huge role in economicgrowth. Think of the changes broughtabout by the shift from nomadism to agri-culture, from the agricultural age to theindustrial age, from the industrial age tothe information age. Innovations in tech-nology increase the efficiency of productionand usher in new goods and services. Inyour lifetime, you are witnessing innova-tions in computer and networking tech-nology that are changing the ways peoplework, shop, conduct business, locate infor-mation, and communicate.

Additional GoalsA society may value goals in addition to thosedescribed above. Environmental protection,full employment, universal medical care, andother important concerns may be among anation’s chief economic goals.

All nations must prioritize theireconomic goals, or arrange them in orderof importance. No matter how a nationprioritizes its goals, one fact remains:achieving any economic goal comes onlywith some kind of economic trade-off.

Economies and ValuesFour different economic systems havedeveloped to address the three keyeconomic questions. Each system reflects adifferent prioritization of economic goals.It also reflects the values of the societies inwhich these systems are present.

Traditional EconomiesA traditional economy relies on habit,custom, or ritual to decide what to

safety net governmentprograms that protectpeople experiencingunfavorable economicconditions

standard of living levelof economic prosperity

traditional economyeconomic system thatrelies on habit, custom,or ritual to decidequestions of productionand consumption ofgoods and services

� The traditionaleconomy ofGuatemala’s QuichéMaya includesregular market days.

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Guide to the EssentialsChapter 2, Section 1, p. 6 providessupport for students who need addi-tional review of the section content.Spanish support is available in theSpanish edition of the guide on p. 6.

Quiz Unit 1 folder, p. 14 includesquestions to check students’ under-standing of Section 1 content.

Presentation Pro CD-ROMQuiz provides multiple-choice

questions to check students’ under-standing of Section 1 content.

Answers to . . .

Section 1 AssessmentSection 1 Assessment1. An economic system is the way in

which a society decides to produceand distribute goods and services.

2. The differences between the economic systems arise from theways that each system answersproduction and distribution ques-tions.

3. Factor payments differ becausesocieties place different values ondifferent resources and products. Apossible example is doctors’ wagescompared to sanitation workers’wages.

4. Governments provide safety nets tofulfill the goal of economic securityand predictability.

5. Answers may include: the Amish(traditional), Cuba (command), andthe United States (market).

6. Students may suggest military secu-rity and a high standard of living forcitizens.

7. traditional economy—values cus-tom rather than innovation; marketeconomy—values individual free-dom, growth, efficiency; centrallyplanned economy—values eco-nomic equity, security; mixed econ-omy—values economic freedom,limited government involvement

8. service to be produced—car wash-ing; how it is produced—by myfriends and me; consumers—peo-ple who want to have their carswashed

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Replace with revised SE page!produce, how to produce it, and to whomto distribute it. There is little room forinnovation or change. The traditionaleconomic system revolves around thefamily. Work tends to be divided alonggender lines. Boys tend to take up the occu-pations of their fathers, while girls followin the footsteps of their mothers.

Traditional economies are usuallycommunities that tend to stay relativelysmall and close. Often these societies workto support entire groups, rather than justthemselves or their immediate families.Agricultural and hunting practices usuallylie at the very heart of the people’s lives,laws, and religious beliefs.

Societies with traditional economieshave few mechanisms in place to deal effec-tively with the effects of environmentaldisaster, such as a flood or drought. Theyalso tend to remain stagnant, resistingchange at both the individual and commu-nity level. They may be slow to adopt newtechnology or radical new ideas. They maynot have access to goods you see every dayat the grocery store. In most cases, thesecommunities lack modern conveniencesand have a low standard of living.

Market EconomiesIn a market economy, economic decisions aremade by individuals and are based onexchange, or trade. The choices made byindividuals determine what gets made andhow, as well as who consumes the goodsand services produced. Market economiesare also called free markets, or capitalism.You will read about the free market indetail in Section 2.

Command EconomiesIn a centrally planned economy, the centralgovernment alone decides how to answerall three key economic questions. Centrallyplanned economies are sometimes calledcommand economies, because a centralauthority is in command of the economy.Section 3 discusses the theories behindcentrally planned economies.

Mixed EconomiesMost modern economies are mixedeconomies—market-based economic systemsin which government plays a limited role.Section 4 describes the reasons for mixedeconomies and the various ways govern-ment is involved in such economies.

Section 1 Assessment

Key Terms and Main Ideas1. What is an economic system?

2. How do a traditional economy, a market economy, acommand economy, and a mixed economy differ?

3. Why aren’t all people paid the same amount in factorpayments for the resources they provide? Provide yourown example of two unequal factor payments.

4. Why do governments provide safety nets for their citizens?

5. Give at least one example of a traditional, a command, and a market economic system.

Applying Economic Concepts6. Using the Databank Examine the graph “Government

Spending, by Category” on page 543. Based on the infor-

mation in the graph, identify what you think are someeconomic goals of the United States.

7. Critical Thinking Create a chart in which you list thesocietal values of each of the four economic systemsdescribed in the section.

8. Try This You and your friends decide to earn money bywashing cars. How are the three economic questionsanswered in this market?

market economyeconomic system inwhich decisions onproduction andconsumption of goodsand services are basedon voluntary exchangein markets

centrally plannedeconomy economicsystem in which thecentral governmentmakes all decisions onthe production andconsumption of goodsand services

command economyeconomic system inwhich a centralauthority is incommand of theeconomy; a centrallyplanned economy

mixed economymarket-basedeconomic system withlimited governmentinvolvement

PHSchool.com

For: Research ActivityVisit: PHSchool.comWeb Code: mnd-1021

Progress Monitoring OnlineFor: Self-quiz with vocabulary practiceWeb Code: mna-1025

Typing in the Web Codewhen prompted will bring students directlyto detailed instructions for this activity.

Progress Monitoring OnlineFor additional assessment, have students accessProgress Monitoring Online at Web Code: mna-1025

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