The document provides an overview of key concepts in economics, including: 1) Economics is the study of how people satisfy unlimited wants through scarce resources. It addresses the fundamental problem of scarcity and how societies answer three basic questions: what, how, and for whom to produce. 2) Traditional, command, and market economies differ in how they answer these questions, with traditional relying on custom, command on central planning, and market on individual choices. 3) Most modern societies have mixed economies that incorporate elements of each system.

1. The Economic Way of
Thinking
Academic Decathlon Lesson 1
Berryhill Economics

2. Economics
 “The theory of economics does not furnish
a body of settled conclusions immediately
applicable to policy. It is a method rather
than a doctrine, an apparatus of the
mind, a technique of thinking which helps
its possessor to draw correct conclusions.”
--John Maynard Keynes

3. Economics—What is it?
 Social science—why? Because it deals
with people and their choices.
 Definition:
Economics is the study of how people try
to satisfy what appears to be seemingly
unlimited and competing wants through
the careful use of relatively scarce
resources.

4. Economics—What is it?
 A simpler definition:
Economics is the study of allocating scarce
resources to meet alternative ends.
 An even simpler definition:
Economics is the study of making
necessary choices.

5. The Fundamental Economic
Problem
 The fundamental economic problem facing
all societies is that of scarcity.
 Definition:
Scarcity is the condition that results from
society not having enough resources to
produce all the things people would like to
have.

6. The Economic Problem
 Scarcity exists because human wants are
unlimited and resources are finite (limited)
 Finite resources restrict the ability to
produce.
 What are resources?

7. Factors of Production
 Resources are things we need to make
other products. They are our FACTORS
OF PRODUCTION.
 Definition:
Production—process of creating goods and
services—takes place when all needed
factors of production are available.

8. Factors of Production
 Factors of Production are
land, labor, capital and entrepreneurship
 Definition:
Land refers to “gifts of nature,” or natural
resources not created by humans. This
includes land, forests, mineral
deposits, livestock, sunshine, climate, etc.

9. Factors of Production
 Definition:
Labor is people, their
time, skill, efforts, and abilities used to
produce a good or service. An example is
people’s ability to work.

10. Factors of Production
 Definition:
Capital is the
tools, equipment, machinery, and factories
used in the production of goods and
services. This includes any equipment
used to make something else like a
bulldozer, a computer, and even money
(known as financial capital).

11. Factors of Production
 Definition:
Entrepreneurship is the special human
resource, distinct from labor, that gives growth
and forward movement of production in a
society. Entrepreneurs take the initiative to
produce a good or service, they make basic
business-policy decisions, they are innovators
that commercialize and develop new
products, and they are risk takers that use their
time and money to produce things with no
guarantee of profit.

12. Factors of Production
 These factors of production must be
present for production to begin.
 Definition:
Production is the process of creating
goods and services and production will
take place only when all needed factors of
production are available.

13. Three Basic Questions
 Because we live in a world of relatively
scarce resources, we have to make wise
economic choices. Each society must
answer these three basic questions to
make decisions about the ways our limited
resources will be used.

14. Three Basic Questions
 WHAT to produce?
--military equipment or other items such
as food, clothing, or housing?
 HOW to produce?
--mass production methods that require a
lot of equipment and few people or should
they use less equipment and more
workers?

15. Three Basic Questions
 FOR WHOM to produce?
--once the society knows what and how it
is producing, these goods and services
must be allocated to someone. How do
they decide who gets what?

16. Different Societies
 Different societies will choose to answer
these economic questions differently.
 How a society chooses to answer the
questions will determine what type of
economy we label that country as having.

17. Traditional Economies
 In traditional economies, the allocation of
scarce resources, and nearly all other
economic activity, stems from
ritual, habit, or custom.
 Usually, habit and custom also dictate
most social behavior, and individuals are
not free to make decisions on what they
want or would like to have.

18. Traditional Economies
 Can anyone think of any traditional
economies that exist today?
 Are there any instances of traditional
economies in our society today?

19. Traditional Economies
 Advantages
--Everyone knows their role—WHAT
questions answered for them
--Everyone knows HOW to produce (same
as their parents did before them)
--FOR WHOM questions answered by
customs and traiditions

20. Traditional Economies
 Disadvantages:
--Discourages new ideas (and therefore
new economic growth)
--Lack of progress leads to lower standard
of living

21. Command Economies
 A command economy (may also be
referred to as a PLANNED economy) is
one in which a central authority makes
most of the WHAT , HOW, and FOR
WHOM decisions.
 Economic decisions are made by the
government: the people have little, if
any, influence over how the basic
economic questions are answered.

22. Command Economies
 Can anyone think of some examples of
command economies that exist today or
have existed in history?
 Are there any instances where our society
has command economy traits?

23. Command Economies
 Advantages:
--Can change direction in a relatively short
period of time
--There is little uncertainty about one’s
role in the society
--Government provides social
reforms/programs for little to no cost to
the public

24. Command Economies
 Disadvantages:
--Not designed to meet the wants of consumers
--System does not give people incentive to work
hard
--Large decision-making bureaucracy
--No flexibility
--Little to no rewards for individual incentives

25. Market Economies
 In a market economy people and firms act
in their own best interest to answer the
WHAT, HOW, and FOR WHOM questions.
 A market is any mechanism that allows
buyers and sellers to find each other and
trade their goods and services.
 People’s decisions influence the
WHAT, HOW, and FOR WHOM.

26. Market Economies
 Can anyone think of any examples of
market economy today or in history?
 Any examples of a market economy in our
own society?

27. Market Economies
 Advantages:
--Can adjust to change over time
--High degree of individual freedom
--Relatively small degree of government
interference
--Decision making is decentralized (not given to
the central government)
--Variety of goods and services available to
consumers
--High degree of customer satisfaction and
standard of living

28. Market Economies
 Disadvantages:
--Doesn’t provide basic needs for everyone in
the society (poor, elderly, sick)
--Doesn’t provide public services (system of
justice, national defense, health care)
--High degree of uncertainty
--Must be reasonably competitive, resources
must be reasonably free to move from one
activity to another, and consumers need access
to adequate info to make wise decisions or
economy can fail very easily

29. Mixed Economy
 An economy in which there are some
elements of a traditional economy, some
elements of a command economy, and
some elements of a market economy
 What the U.S. is said to have