Three Economic Questions & Basics
Every society must answer these three key questions.
What goods and services should be produced? How should they be produced? Who should consume them?
In a free market, this personal motivating force drives decisions.
What is self-interest?
Another name for a centrally planned economy.
What is a command economy?
The doctrine that government generally should not intervene in the marketplace.
What is laissez-faire?
A person/group in one residence vs. an organization that produces/sells products.
What are household and firm?
The amount a business receives in excess of its expenses.
What is profit?
The regulating force: struggle among producers for consumers’ dollars.
What is competition?
This system allows some private ownership and can be democratic; the other owns all production and is always authoritarian.
What are socialism and communism?
A market-based system with some government involvement—most modern economies are this.
What is a mixed economy?
The process of bringing new methods, products, or ideas into use, driving growth.
What is innovation?
Producing flip phones today instead of smartphones wastes resources due to very little of this.
What is demand
Focusing on a limited number of activities to become more productive.
What is specialization?
Major disadvantage: no profit motive leads to bureaucracy and slow response to demands.
What is lack of economic efficiency?
Government programs that protect people from unfavorable economic conditions (people dislike risk and want security).
What is a safety net?
An economic system relying on habit, custom, or ritual to answer the three questions.
What is a traditional economy?
Combining land, labor, and capital to find the most productive way to make goods.
What is the efficient / effective method?
Four advantages include economic efficiency, freedom, growth through innovation, and this broader benefit (wider variety of goods).
What are additional goals? (or economic incentives/goals)
In these economies, these people benefit most while ordinary citizens face shortages.
Who are government officials?
Selling government businesses to private investors so they can compete (example in transition economies).
What is privatization?
Without government, public schools might only serve this group (private/charter dominance).
Who are the wealthy?
This level of economic prosperity or well-being is affected by how well the three questions are answered.
What is standard of living?
This entrepreneur built a cosmetics empire empowering women through direct sales; Dolly Parton grew a small park into Dollywood—both show free market success via self-interest and innovation.
Mary Kay Ash
Two key disadvantages: limited innovation (no profit incentive) and poor equity (favoritism and shortages for average people).
What are limited economic growth and poor economic equity?
Pure free markets risk inequality/monopolies; pure command economies stifle innovation—most economies (like the U.S.) mix them for balance, public goods, and regulations.
What explains why most modern economies are mixed?
Both Mary Kay Ash (direct sales model for women) and Dolly Parton (Dollywood evolution) succeeded through these free market principles: personal vision, creative models, and entrepreneurial freedom.
What are self-interest, innovation, and economic freedom?