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Making Decisions About Production

No society has enough productive resources available to produce everything people want.

Every society must, therefore, make choices. Rules and regulations determine choices.

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Basic Economic Questions A society makes economic choices by answering three economic questions:

• What should be produced?• How should it be produced?• Who should share in what is produced?

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What Should Be Produced? Deciding to use a resource for one purpose means giving up the opportunity to use it for something else. What is this called?

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How Should It Be Produced? When a society decides what to produce, it must also address other types of questions, such as what methods will be used, how many people will work on the production, and what will be the quality of the items produced?

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Who Should Share in What Is Produced?

This question focuses on the concept that people can’t get everything that they want because society doesn’t have enough resources.

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Who Should Share in What Is Produced?

In most societies, people can have as many goods and services as they can afford to buy based on the income they receive.

Capitalism, Socialism, and Communism

Capitalism►Capitalism – an economic system based on private ownership and on the investment of money in business ventures in order to make a profit.

Capitalism►Adam Smith

University professor in Scotland

Supported CapitalismWrote “The Wealth of Nations”

Capitalism►Ideas:

Businesses compete with each other for the consumer’s money.

Each business tries to provide goods and services that are better and less expensive than their competition.

CapitalismA market economy aims to produce the best goods at the lowest prices.►Supply and Demand

CapitalismGovernment should not interfere in the economy.►Laissez faire

CapitalismLaissez faire – letting owners of industry and business set working conditions without interference►No government regulations, such as minimum wage laws

Market Economy (Free Enterprise)

Also called a Free Market Economy or Free Enterprise Economy

Businesses and consumers decide what they will produce and purchase and in what quantities

Decisions are made according to law of supply & demand

Supply and demand of goods and services determine what is produced and the price that will be charged.

Advantage—competition to have the best products and services

Disadvantage—huge rift between wealthy and poor

Note: a true market economy does not exist.

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Command Economy In a command economy a central authority makes the key economic decisions.

A command economy is also called a planned or managed economy.

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Command Economy There are two types of command economies.

In a strong command economy, such as communism, the state makes all the economic decisions.

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Command Economy In a moderate command economy, also called socialism, there is some form of private enterprise. The primary advantage of a command economy is that it guarantees everyone an equal standard of living.

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Command Economy There are some disadvantages to a command economy.

Since the state provides all goods and services in a strong command economy, there is little choice of what to buy.

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Command Economy Another disadvantage to the command economy is that there is no incentive for entrepreneurship when you can’t run your own business.

Command Economy The government (or

central authority) determines what, how, and for whom goods and services are produced.

Two types: Strong Command –

where government makes all decisions (communism – China, Cuba)

Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden)

Advantages Guarantees equal

standard of living for everyone

Less crime and poverty

Needs are provided for through the government

Disadvantages Minimal choices Fewer choices of items No incentive to

produce better product or engage in entrepreneurship

Also known as a Planned or Managed Economy

Communism“The worker of the world has

nothing to lose, but their chains, workers of the world

unite.” - Marx

“From each according to his/her ability, to each according to his/her

need."

Socialism

“From each according to his/her ability, to each

according to his/her work."

Socialism►Government actively regulates the economyControls major industries and resources.

Communism►Communism – an economic system in which all means of production are owned by the people, private property does not exist, and all goods and services are shared equally.

Communism►Karl Marx

German journalistRadical Socialist

Wrote “The Communist Manifesto”

Communism

►Friedrich EngelsSon of a wealthy German textile entrepreneur

Radical SocialistCo-Wrote “The Communist Manifesto” and “Das Capital”

Communism►In many ways, Communism was a reaction to the Industrial Revolution and Capitalism

Communism►The Industrial Revolution intensified class struggle (rich vs. poor)“Haves” take advantage of “Have-Nots” (proletariat)

CommunismWorkers are exploited by employers

The labor of workers profits employers

Communism►Marx and Engels called for workers of the world to unite and overthrow the rule of the rich.Wealth would be redistributed

Classes and private property would cease to exist