Lesson 1.3: The Three Key Economic Questions

Flashcards made from a presentation segment created as a lesson on the basic questions of economics.

Economics

The study of how people make decisions in a world with finite resources but infinite needs and wants (scarcity)

Questions of Allocation

There are three questions:

1. What is produced?

2. How is it produced?

3. For whom is it produced?

What is produced

How resources should first be allocated to in general categories, examples:

• Governmental spending on schools, highways, or recreation centers

• Economic decisions for national defense or social services

• Agricultural decisions for various crops

How it is produced

How the different factors of production (land, labor, capital) are combined in different ways according to resource allocation, examples:

• Burger-making machines or grills

• Education through public or private institutions

• Energy sources and environmental considerations

For whom it is produced

To whom the goods or services are consumed and distributed, largely based on income distribution and market prices, addressing income inequality and access to resources

Factor payments

The income people receive in return for supplying factors of production (land, labor, capital)

• Landlords collect rent

• Workers earn wages

• Lenders receive interest

• Entrepreneurs make a profit

Economic system

A particular set of social institutions which deal with the production, distribution, and consumption of goods and services within a particular society with four types:

1. Traditional

2. Command

3. Market

4. Mixed

Efficiency

The maximization of production and meeting societal consumption and demand within the limits of scarcity

• A manufacturer can be inefficient if they produce desktops, not laptops

Market freedom

The ability for people to make their own choices; this aligns with traditional American cultural values but with the risk of failure and inequity

Safety net

A set of programs to protect people who face unfavorable economic conditions such as layoffs, injuries, or natural disasters

• Some provide pensions or basic income to the retired or elderly as well

Equity

Most commonly defined as “fairness,” it refers to how a country divides its economic shares amongst a population

• Division equally or based on production

• Distribution to those unable or unwilling to produce

• Conflicts between economic equity and freedom

Growth

Required for a country’s economy with an increasing population to provide more jobs, better incomes, and a higher standard of living

Innovation

The process of bringing new methods, products, or ideas into use

• Computer technology is a good example of this

Economic system trade-offs

The trade-offs a country may make as it adopts economic policies, such as environmentalism at the cost of higher production or safety nets at the cost of growth