The Three Key Economic Questions
What are the three key economic questions?
What goods and services should be produced?
How should these goods and services be produced?
Who consumes these goods and services?
What is a free market economy and what are two other names for this type of economy?
A free market economy is an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets. In this type of economy, the people are able to decide what to exchange or make. It is also known as free enterprise or capitalism.
What is a centrally planned economy and what is another name for it?
A centrally planned economy is also known as a command economy. It is an economic system in which the government makes all decisions on the three key economic questions.
Which two economies is a mixed economy made up of?
Free-market and centrally planned economy.
In a mixed economy, there are three entities that interact in the circular flow chart. Name those three entities by the names on the flow chart.
Households: a person or group of people living in a single residence (owns LLC and are consumers).
Firms: an organization that uses resources to produce a product or service, which it then sells (transforms LLC into goods and services).
Governments.
List the five economic goals societies generally strive for.
Efficiency, freedom, security, equity, and growth.
What is specialization and how would it lead to efficiency?
Specialization is the concentration of productive efforts of individuals and businesses on a limited number of activities. It leads to efficiency because people can now earn income by specializing in jobs and use the income to buy products that may be inconvenient for them to produce on their own. This saves people time and resources, which makes society more efficient.
What are two examples of communist economies?
USSR, China, and Cuba
True or false: There are nations in the world that have either a pure free-market or command economy.
False; This is because there are some societal needs that need central planning by a government to achieve
What is sold in a product market and what is sold in a factor market?
The factor market is an arena of exchange in which firms purchase the factors of production from households (buy/rent land, hire workers, borrow money to purchase capital).
The product market is the arena of exchange in which households purchase goods and services from firms (households buy goods and services with money they receive from firms).
What is an economic system?
Economic System: the structure of methods and principles a society uses to produce and distribute goods and services.
What is the difference between price competition and non-price competition?
The difference between price and non-price competition is that in price competition, producers compete to offer the lowest price for a good or service that is identical to goods made by other producers, while non-price competition is when producers compete by offering higher quality goods or goods with different features.
Karl Marx was the father of communism and believed that labor and capital were in conflict because he believed that labor was being exploited by capitalists. As a result, of growth, efficiency, and equity, which one did Marx value the most?
Equity.
Name two countries that are a mixed market, but currently have heavy government involvement.
North Korea and China.
What is monetary flow?
Monetary flow is the flow of money amongst households, firm, and the government. It is money being moved around when things are bought and sold. (Think who is paying who and who is getting paid.)
List three traits of a traditional economy.
The economy is a small community that centers around a family or tribe.
Work in this economy is divided by gender lines. They are a hunter-gatherer and nomadic society.
The agriculture and hunting practices lie at the center of people’s lives, laws, and religious beliefs.
The people in this type of economy only produce what they need to survive. And they rarely produce surplus.
They rely heavily on barter. But eventually, they will evolve into some form of currency for trade.
The “invisible hand” is a metaphor created by Adam Smith to describe a free market economy. What are the two “invisible” forces that help regulate the free market?
The two “invisible forces” are self-interest and competition. Self-interest motivates people to act, while competition will adapt and react to how the people are acting in the market. These forces will regulate the free market and theoretically keep it in balance.
A centrally planned economy opposes private property, free market pricing, competition, and consumer choice.
Name two countries that are a mixed economy, but have more of a free market economy foundation.
Singapore, Hong Kong, and United States.
How does a government collect money to purchase what they need?
They collect taxes from both firms and households.
List two disadvantages of a traditional economy.
The traditional economy has few safeguards against natural disasters.
Economies are slow to adopt innovations and have limited range of goods.
The traditional economy lacks modern conveniences.
The people in this economy may not have access to a wide range of goods.
List two advantages of a free market.
Economic efficiency, where producers only try to make only goods and services people will buy at prices they are willing to pay.
Economic freedom, where workers work where they want, firms make what they want, people buy what they want.
Economic growth, where competition encourages innovation.
An additional goals, where there are a wider variety of goods and services that allow for consumer sovereignty (the power of consumers to decide what gets produced by choosing the companies they support/buy from.)
List two disadvantages of central planning.
Economic efficiency is stifled because the government owns all factors of production (fixed wages make workers lack incentives to work faster or produce more and large bureaucracy makes decisions expensive and inflexible to meet quick changing consumer demands.)
Economic freedom is almost non-existent, as people sacrifice individual freedoms to pursue societal goals (this takes most economic choice away from producers and consumers).
Economic growth is slow because the government does not reward innovation and they discourage change.
Economic equity is rare because government officials and the people in charge are supposed to distribute goods and services equitably, but they fail to do so. They favor themselves and people in favored careers generally have higher incomes and wider access to better goods and services.
America is a mixed economy with a foundation based in the free market. Name two things that the government does to help its people that the people would not be able to achieve if they were left alone.
The government provides central plans to build highways across the nation, as well as national defense. It is also able to provide the societal goal of equity by providing things like public schools. It helps protect property rights and intellectual property. They make sure that exchanges in the marketplace are fair and safe (America has public disclosure, food safety, antitrust, and pharmaceutical laws.)
When the government is buying war planes from Lockheed Martin, what is label you would put for this transaction on the circular flow model?
Expenditures: the government is spending money to buy the planes
Government purchases: the government is buying the planes and getting them from Lockheed Martin