CHAPTER 13: WHAT IS AN ECONOMY?

Social Science

People’s Many Wants

We all have wants and needs in society Basic wants are food, clothing, and

shelter, while other wants are to be educated, to be entertained, and to have good health care

Wants are determined by the environment, the societies in which we live in, and the person we are

Wants can change overtime, with styles coming and going to people growing older and wanting different things

Using Resources

Factors of production are the resources people have for producing goods and service to satisfy their wants

There are three basic factors in production: Labor-the knowledge and skills

used to work Land-natural resources used to

produce goods and services Capital-anything produced in an

economy that is used to produce other goods and services can be tools, machines, buildings,

food, etc.

Production to Consumption

Labor, land, and capital are combined to produce goods in a process called production

Production is followed by distribution, when the goods produced are made available to the public

Consumption occurs when the public buys and uses goods and services

All these combine in a process that is organize to satisfy a person’s particular wants

Making Choices Because there aren’t enough goods to

satisfy everyone’s wants, people must always make a choice as to which wants will be satisfied and which will not

The decision making process comes in two parts: Benefits-which want will benefit you in the near

or long-term future Cost-what choosing a particular want will result

in Every economic decision has an

opportunity cost, or the highest valued benefit given up when a choice is made

Scarcity Society always faces scarcity, or when

resources are always limited compared with the number and variety of wants people have Based on the relationship between wants and the

resources available to satisfy them Each decision to use resources to produce

one kind of good or service is also not to use the same resources to produce something else Conservation of resources allows for production

of more goods later on These decisions are made usually by large

businesses and governments

What and How? One of the basic economic

decisions made everyday are what to produce and the quantity, or amount, of that product to produce Owners of products and resources

make this decision Another major decision is how

to produce goods and services Owners must decide how much of

a resources goes into a product and how to use technology, or the practical application of science to commerce or industry, in the process to cut back on costs

Who Gets What

The last choice producers of goods must make is who gets the goods and services and how much of it do they get Factors like types of people,

location, and overall desires of the population come into play

To answer this question, a society can either split the goods evenly throughout the community or allow the citizens to compete for who gets what goods and services

Traditional Economics The first type of economics is

traditional economics, when basic economic decisions are made according to long-established patterns of behavior that are unlikely to change

The family, or tribe is the central part of traditional economics, and decide what to produce, how to produce it, and who gets what is produced

The people in the tribe usually have their own resources, so they can decide from day to day what they need to do

Command Economics The second type of economics is

command economics, where the government or a central authority owns or controls the factors of production and makes the basic economic decisions

A central planning group makes most of the economic decisions about how, what, and how much to produce The group makes the choices as to

the goods that are produced, and who gets these goods depends on the goals and values of the group

Market Economics The third type of economics is market economics, in

which private individuals own the factors of production and are free to make their own choices about production, distribution, and consumption

All economic decisions are made through a kind of bargaining process that takes place in markets, or a place or situation in which buyers and sellers agree to exchange goods and services The value of what you have to offer sets the value of what

you can get People are free to decide how to use their resources as

well as to start their own businesses and choose what jobs they want to do

Competition is favored in this economy, where people compete to gain the goods they want People with more money usually acquire more goods

Market Economics An incentive in a market economy that people use

is to make a profit, or a difference between the total cost of production and the total revenues received from buyers

The desire to make a profit also leads people to invest, or to use money to help a business get started to grow, with the hope that the business will earn a profit in which you can share

There are two other names for a market economy: Free enterprise: the system in which individuals in a

market economy are free to undertake economic activities with little or no control by the government

Capitalism: the system in which people make their own decisions about how to save resources as capital and how to use their capital to produce goods and provide services

Modern-Day Economics

Today, most countries have a mixed economy, one that is a mixture of the three basic systems

The economy of China, even though it’s a Communist government, has a mixed economy of command and market economics

The economy of the United States, even though it’s a Democratic government, is a market economy with some elements of command economics Certain businesses are controlled by

the government