Chapter 2

THREE ECONOMIC ISSUES

Three economic questions

Ø What goods and services to produce?

Ø How are goods and services produced?

Ø For whom to produce? / Who consumes

these goods and services?

 Three economic questions

§ How do the businesses below answer the three economic

questions?

§ Match each question with an answer for each of the

businesses below.

§ Write the letter beside each question.

 Three economic questions

1. McDonalds, a fast-food restaurant

___ What to produce?
___ How to produce it?
___ For whom to produce it?
A. Consumers who want food cooked quickly or to take out, people who want food that is
cheap
B. Make food fast and cheap
C. Consumers who want to enjoy a relaxing, fancy meal
D. Make food healthy and nutritious
E. Fast-food (burgers, french-fries, soft drinks, etc)
 Three economic questions

2. Wal-mart, a department store

___ What to produce?
___ How to produce it?
___ For whom to produce it?
A. Make a few high quality, expensive items
B. Consumers who always want a low price
C. Buy items for your home: toys, clothing, etc. and sell them to end-users
D. Make a variety of useful items at a low price
E. Consumers who always want very high quality
 Three economic questions

3. Internet Provider, like FPT, Viettel and VNPT

___ What to produce?
___ How to produce it?
___ For whom to produce it?
A. Make it expensive so that only a few people can afford it
B. A service that connects people to the Internet
C. Make it fast and available to people who want the service
D. Computer and Internet users
E. People who love books and the library
 Three economic questions

Ø What goods and services to

produce?

Ø How are goods and services Every society’s answer

is based on their
produced?
economic system
Ø For whom to produce? /
Who consumes these goods
and services?
 The appearance of economic system
Unlimited Limited
Problem of
needs and
Scarcity resources
wants

Three economic questions:

What to produce?
How to produce?
For whom to produce?

Answer these
questions/Making
economic choices
Consumers, Consumers
Customs Government Producers and
and Producers
Government

Traditional Command Mixed Market

economy economy economy economy
 What are economic systems?

§ The way that a group, community or nation organizes

itself for production
§ The method used by a society to produce and distribute
goods and services
§ A set of laws, institutions and common practices that help
a nation define how to use its scare resources to satisfy as
many of its people’s needs and wants as possible
1. Traditional Economic System

§ A traditional economy is a system

where traditions, customs, and
beliefs determine the answers to
the basic questions of what, how,
and for whom to produce.
§ Examples of this economic
system: Remote tribal areas in
South America, Africa and Asia
1. Traditional Economic System

FEATURES
§ The existence is primarily based on traditions and customs
§ Individuals exist on a subsistence level
§ Bartering (trading without money/ exchanging) is the main form of
trading
§ Hunting, fishing & farming are the main economic activities
§ Resources are owned/ controlled by a sovereign or feudal lord.
§ The decision of What/ How/ For who is determined by customs and
traditions
1. Traditional Economic System

ADVANTAGES
§ Tend to be sustainable, predictable and continuous because
of the slow growth
§ Tend to emphasize equal distribution of goods and services -
> Provide economic security
§ Social positions within society are already established ->
Every member knows exactly what they are to do -> Strong
social network
1. Traditional Economic System
DISADVANTAGES
§ This type of society is often very slow and resistant to
change -> it does not take advantage of technological
change.
§ There is relatively little promotion of intellectual and
scientific development -> Rarely achieve the goals of
economic freedom, economic growth & high standard
living
§ There is inadequate use of skill in relation to the factors
of production -> No upward movement of labor
2. Command Economic system

§ A command economy is a system in which a country’s

government makes economic decisions on what is
produced, how much of each good is produced, and how
goods and services are distributed equally.
§ Examples of this economic systems:
- The former Soviet Union
- China (1949-1978)
- Cuba (1959-1991)
- Vietnam (1975-1986)
- North Korea – present day
2. Command Economic system

FEATURES
§ Government controls all economic activities -> Rulers and
centralized government imposes their economic choices on the
society
§ Government decides what goods are produced, how much of each
good to produce and how much each person should get
§ Government owns most of the productive resources and decides how
to allocate them through central plans
§ Each individual has obligations to serve and be loyal to the state. In
return, central planners take care of individual needs like food,
shelter, medicine, education, etc.,.
 2. Command Economic system

ADVANTAGES
§ Provide economic security
§ The welfare of all citizens is the primary goal
§ Full employment of all available resources (low
unemployment)
§ Have the ability to adjust rapidly to changing
circumstances
§ Tend to have no industrial unrest such as striking or
any wasteful competition
2. Command Economic system

DISADVANTAGES
§ No freedom of choices for customers or producers
§ Too rigid to adjust when changes occur, can result in shortages
§ Lack of incentive for workers -> low motivation, morale and
efficiency
§ There are too much unnecessary procedure and paperwork
(red-tape or bureaucracy)
§ Conflicts of interests can arise because what the country needs
may not be what the people want.
§ There is wastage of manpower because large numbers of
people are required for central planning.
3. Market Economic system
§ A pure market economy is a system in which consumers
(buyers) and businesses (sellers) decide what they want to
produce and purchase in the marketplace without any
influence or interference from a government or other
outside body.
§ The interaction of buyers and sellers is motivated by self-
interest and regulated by competition -> “the invisible
hand” of the marketplace.
§ Example of Free Market: There is no real life example of a
purely free market economy, this only exists in theory.
3. Market Economic system

FEATURES
§ The government plays little role in economic
activity, only involves to provide law and order and
to assist with economic development.
§ Economic decisions are made based on the changes
in prices that occur as buyers and seller interact in
the market place
§ Freedom of individuals (consumers and producers)
§ 4 basic elements: private property, freedom of
enterprise, profit maximization, competition
3. Market Economic system

ADVANTAGES
§ Manufacturers are free to produce what the consumers demand without
control by government or any single individual
§ Consumers are free to spend their money
§ A large variety of products are produced to satisfied the needs and wants
§ Prices are determined by the forces of supply and demand (Price
mechanism)
§ Efficient production is promoted since resources are allocated to their
most profitable use.
§ Competition among firms improves quality, keeps prices low and spurs new
technology and innovation.
3. Market Economic system

DISADVANTAGES
§ Only goods and services with highest profit will be produced
§ Consumers can be charged with high prices for essential products
§ This system doesn’t always provide the basic needs to everyone
in the society. People with higher incomes will be able to afford
the most and those with low incomes the least -> Great
inequality as the few rich get richer and the many poor get
poorer.
§ There is much pollution associated with this system especially
when industrialization begins to develop.
§ There tends to be an over-consumption of demerit goods such as
alcohol, cigarettes and drugs
4. Mixed economic system

MARKET ECONOMY
Economic decisions are made in the marketplace
according to the laws of supply and demand.

MIXED
Who should
ECONOMY What should How should it share in
be produced? be produced? what is
Combination produced?
market and
command
economy.
COMMAND ECONOMY
Government makes all key economic decisions.
4. Mixed economic system
§ A mixed economy is one in which there exists a mixture of market
determination (free enterprise) and government control.
§ Some countries rely much more heavily on market decisions than others,
some other countries put higher weight toward the command principle.
4. Mixed economic system

FEATURES
§ Economic decisions are driven by price and
also by the state
§ The aim of the private sector is to maximize
profits while the aim of the public sector is
to maximize social welfare
§ The public sector produces goods and
services that the private sector is unable or
unwilling to produce, with a bureaucratic set
up like the planned economy (i.e. freeways,
public transportation)
4. Mixed economic system

ADVANTAGES
§ The state can through the passing of laws -> protect citizens
from unfair trading practices
§ Both government and the private sector can cooperate in
offering certain services
§ Less inequality because governments aim to maximize social
welfare, they also force individuals and businesses take
responsibilities by contributing towards the welfare of
societies.
4. Mixed economic system

DISADVANTAGES
§ Too much regulation may dampen the free enterprise spirit

§ Some state-owned industries are allowed to operate

inefficiently, thus wasting resources.

§ The creation of monopolies

§ Inequitable distribution of wealth

What do economic systems have in common?

1. Economic problems
§ Scarce resources
§ Unlimited needs, wants and demands
§ Making choices of how to allocate these resources
2. Economic questions
§ What to produce? Our wants exceed resources, we have to decide what we want
most and sacrifice less desired activities and goods.

§ How to produce? Find an optimal method of transforming economic resources

(input) into goods and services of value (output)

§ For whom to produce? How an economy’s output is distributed across members

of society.
How are economic systems different in
addressing three economic issues?
How are economic systems different in
addressing three economic issues?
 Ownership
u Is very important in determining distribution.
u Is the right given to individuals and firms by law to possess, employ,
rent and transfer means of production as they wish.

Centrally Planned Mixed Market

Government ownership of Mostly private (individual

economic resources and or business) ownership of
state planning economic resources
Government and private
ownership of economic
resoures split rather evenly
Understanding Political Economies
§ A democracy is a political system whereby a freely elected government
represents (for a set term) the majority of citizens. There are usually many
parties with a variety of political views.
§ A dictatorship is a political system whereby a single person or party has
absolute control over an entire nation (usually via the military). There are no
free elections allowed.
Understanding Political Economies

§ Capitalism: private ownership of business, goods and services

are provided by individuals and regulated by marketplace
competition

§ Socialism (Karl Marx): Government ownership of factors of

production, equal distribution of wealth. There is no financial
incentive for people to increase their productivity.

§ Communism: Marx envisioned that a successful socialist model

would develop into communism in which working class owns
everything and the collective produces as a whole is shared out
according to need
Understanding Political Economies
Political systems In the modern world Examples
Capitalism § Government involve more in the economy to Hong Kong
invest on social campaign and increase social USA
welfare Singapore
Japan
Marxist Socialism § Allow individuals to do businesses and have Vietnam
(dictatorship) ownership rights. Laos
§ Privatization by selling state-run businesses China
§ The state only control some essential and Cuba
non-competitive industries North Korea?
(Telecommunication, Transportation, Natural
resources)
Democracy § The society is run as the capitalism pattern, Norway
Socialism but the Government impose a very high Denmark
income tax in order to spend on social Sweden
welfare Finland
What do economic systems have in common?

Economic goals to answer 3 questions

§ Economic efficiencies: make the most of their limited resources
§ Economic freedom: freedom from the government in production and distribution
§ Economic stability: assurance that goods and services will be available when people need
§ Economic security: less fortunate people will receive economic support they need; a safety net will
assist in case of disaster
§ Economic equity: fair distribution of resources and wealth
§ Economic growth and innovation: innovation -> growth -> higher standard of living

Most societies consider these goals when making economic

choices, but different societies with different economic
systems will differ in the degree of importance they set to
each goal.
THANK YOU!