All people face Scarcity- too many wants and too few resources so Decisions must be made. These decisions come down to Three Basic Economic Questions of scarcity: What goods and services will be produced? What will the economy produce with the resources? How will they be produced? What methods will be used? For Whom to produce Who gets the goods and services? Economic system (economy) an organized way of providing for the wants and needs of people. 1). Traditional 2). Command 3). Market 4. Mixed Economic activity is based on tradition with roles determined by previous generations. Examples: Medieval Europe Various hunting tribes in Africa and northern Canada Everyone knows what their role is. Life is generally predictable and stable. Discourages new ideas and new ways of doing things. Lack of progress leads to a lower standard of living. Economic activity is planned out by the government, with people having little influence. Examples: Cuba North Korea Former Soviet Union Abolition of property rights State seizure of transportation services State seizure of communication services Elimination of religion and traditional families. State seizure of industry Citizens are forced to work Allows an economy to change direction very quickly. After Stalins first two Five Year Plans, Russia moved from a rural agricultural economy to an industrial economy. Little uncertainty as to who will do what. No unemployment because the government gives everyone a job (whether it is needed or not). Ayn Rand - Anthem Not designed to meet the wants of consumers. Stalins Five Year Plan directed resources away from both agriculture and consumer goods. Shortages and waiting lines. Provides strange incentives Do just enough to meet quotas. No rewards for individual performance. Tetris No flexibility to handle problems. Great Depression disrupted the USSRs First Five Year Plan Requires a large decision making agency. Stalins Five Year Plans governed all economic activity in Russiathats a lot of paperwork! People and businesses act in their own best interests to answer the three basic economic questions. Lure of personal and financial gain leads consumers and businesses to interact in various markets. Each person acts as they see fit in order to advance their own interests. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Wealth of Nations, 1776 Economy can adjust to change over time Businesses can adapt to changing consumer tastes by creating new/different products. High degree of individual freedom Businesses and individuals are free to do what they want. Small degree of government interference (Mixed Economy) Economic decisions are made by all, not limited to government officials. Seemingly unlimited variety of goods and services available to consumers. Does not provide for the basic needs of everyone. Elderly, disabled and other groups would be unable to survive in a market economy without governmental assistance. Does not provide certain services that people value. National Defense & Education. High degree of uncertainty Tommy Boy Jobs going overseas Market Failures Mixed Economy Capitalism Based on 4 important principles Private Property Freedom of choice Profit Competition Economic Freedom Economic Equity Economic Security Price Stability Individuals have freedom to choose their own occupations, employers, and spending habits. Businesses have freedom to choose how and where to produce goods/services. Are we meeting this goal? People should receive equal pay for equal work. People should receive adequate pay for the work they perform. People should all have the same opportunities to get ahead. Are we meeting this goal? We should have protection from negative economic events such as layoffs and injuries. Social Security federal program that provides disability and retirement benefits. Everyone should have their basic needs met. Are we meeting this goal? We should have stable prices that protect against inflation. Inflation a rise in the general level of prices. Are we meeting this goal? People get mad!!!!!!!