What is an Economy?Chapter 3.1

Economic SystemsEconomy: the organized way a nation

provides for the needs and wants of its peopleA county’s resources determine economic

activities such as ManufacturingBuyingSellingTransportingInvesting

Resources Are all the things used in producing goods

and services Economists call these “Factors of

Production” 4 categories

1) Land (tangible)2) Capital (tangible)3) Labor (intangible)4) Entrepreneurship (intangible)

LandEverything contained in the earth or found in

the seasCoal, crude oil, lakes, trees, plants, soil etc.

CapitalMoney to start and

operate a businessAlso goods used in

production FactoriesOffice buildingsComputersToolsLumber (processed

raw materialsSteel

Includes infrastructurePhysical

development of countries

RoadsPortsSanitation facilitiesTelecommunications

LaborAll the people who work (full & part-time)Economies with well-educated and well-

trained labor have an advantage

EntrepreneurshipSkills of people who invest their time and

money to run a businessOrganize factors of production to create

goods and servicesEmployers of a population

ScarcityDifferent economies have different amounts

of resourcesLimited resourcesUnlimited wants and needsScarcity forces nations to make economic

choices

How Does an Economy Work?Three Basic Questions nations must ask:

1. Which goods and services should be produced?

2. How should goods and services be produced?3. For whom should the goods and services be

produced?

Answers define their economic system

Economic Systems: 3 Categories1. Traditional Economy2. Market Economy3. Command Economy

Traditional EconomyTraditions & rituals answer economic ?’sBased on cultural or religious practicesPassed from one generation to nextActivities assigned through tradition rather

than choice

Market EconomyIn pure market economy

there is no government involvement in economic decisions

Consumers decide what should be produced

Businesses decided how to produce goods and services

Command EconomyGov’t decides what,

when and how much will be produced and distributed

Gov’t controls factors of production

So what type of economy do we have?

Traditional?Market?

Command?

Mixed EconomiesNo economy is purely traditional, market, or

commandUS = mixed economy leaning toward market

economy (we have gov’t involvement)3 political philosophies have shaped world

economies: 1. Capitalism2. Socialism3. Communism

CapitalismPolitical & economic philosophy

characterized by marketplace competition and private ownership of businesses

Same as “free enterprise”Political foundation is usually Democracy

power in the hands of the peopleMultiple political partiesEx. US, Japan

CommunismIs a social, political, and economic philosophyGov’t is authoritarian- controls factors of

productionNo private ownership of property or capital“goods owned in common” theory where

gov’t is representing the community as a whole

Little or no economic freedomEx. Cuba, North Korea

SocialismOriginally referred to a system on its way to

communist ideal of classless societyToday most socialist countries are

democraciesMore gov’t involvement than Capitalist

nations – runs key industries, makes decisionsHave more social services Businesses & individuals pay higher taxesEx. Canada, Germany