Economics: Key Concepts, Types, and Circular Flow Model

3 Economic Questions

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

Purpose of the 3 Economic Questions

They guide how societies use limited resources and shape the economic system they choose.

Economic Efficiency

Using resources wisely and reducing waste.

Economic Freedom

People/businesses can make their own economic choices.

Economic Equity

Fairness in how resources and opportunities are distributed.

Economic Growth

Increasing production and improving the standard of living over time.

Economic Security/Stability

Protecting people from risks (unemployment, inflation, poverty).

Traditional Economy: Characteristics

Based on customs, heritage, and past practices; roles passed down.

Traditional Economy: Strengths.

Stable, predictable, everyone knows their role.

Traditional Economy: Weaknesses.

Little innovation or progress; low standard of living.

Traditional Economy: Examples.

Indigenous tribes, rural villages in parts of Africa/Asia.

Command Economy: Characteristics.

Government makes all economic decisions; government owns major industries.

Command Economy: Strengths.

Can provide basic needs for all; can respond quickly to crises.

Command Economy: Weaknesses.

Low freedom; inefficiency; little incentive to innovate or work hard.

Command Economy: Examples.

North Korea, Cuba, former Soviet Union.

Market Economy: Characteristics.

Individuals/businesses make decisions; private property; competition; supply and demand set prices.

Market Economy: Strengths.

High freedom, innovation, efficiency, wide variety of goods.

Market Economy: Weaknesses.

Inequality, lack of security, some services underprovided (roads, defense).

Market Economy: Examples.

No pure market economy exists; Hong Kong is closest historically.

Mixed Economy: Characteristics.

Combination of market freedom and government involvement; government regulates for safety and fairness.

Mixed Economy: Strengths.

Balance of freedom and protection; government fixes market failures.

Mixed Economy: Weaknesses.

Higher taxes; government may be slow or inefficient.

Mixed Economy: Examples.

United States, United Kingdom, most modern nations.

Circular Flow Model.

Shows how money, goods/services, and resources move between households, businesses, and government.

Households in Circular Flow

Provide labor/resources; buy goods/services; pay taxes.

Businesses in Circular Flow

Produce goods/services; hire workers; pay wages.

Product Market

Households buy goods/services from businesses.

Factor Market

Businesses buy labor/resources from households.

Government in Circular Flow

Collects taxes, provides public goods, regulates the market.

Why Circular Flow Illustrates a Mixed Economy

Shows both private market activity and government involvement (taxes, spending, regulation).

U.S. Economy Type

A mixed-market (free enterprise) system.

Private Property Rights

People can own homes, land, businesses, and other assets.

Competition

Businesses compete, leading to lower prices and better quality.

Profit Motive

Businesses aim to make a profit; encourages innovation and efficiency.

Consumer Sovereignty

Consumers influence what is produced by what they choose to buy.

Voluntary Exchange

Buyers and sellers willingly engage in transactions.

Economic Freedom in the U.S.

People can choose their jobs, start businesses, and spend money as they want.

Limited Government

Government regulates for safety and fairness but does not control everything.