WHAT IS AN ECONOMY? Economy or Economic System The way a nation makes choices. These choices involve how the nation will use its resources to produce and distribute goods and services. Resources All things used in producing goods and services  Factors of Production – the technical term economists use for resources  Resource 1 – Land   Everything on the earth in its natural state / the earth’s natural resources Resources Include: – – – Everything contained in the earth or found in the sea Coal and crude oil are examples A lake and all the living things in the lake are also examples Resource 2 – Labor   All the people who work in the economy Labor includes: – – Full and Part-time Workers Both the Public and the Private sector Resource 3 - Capital    The money needed to start and operate a business The goods used in the production process Examples are: – – – – Factories Office Buildings Computers Raw materials that are processed into a more useful form (lumber, steel) Resource 4 - Entrepreneurship   The skills of the people willing to risk their time and money to run a business Entrepreneurs organize the other factors of production to create the goods and services desired in an economy Infrastructure    The physical development of a country Things necessary for production and distribution of goods and services Parts of the infrastructure include – – – – Roads Ports Sanitation Facilities Utilities Scarcity The difference between wants and needs and the resources available to meet these needs is called Scarcity. Nations have unlimited wants and needs but limited resources – Scarcity forces the nations to make economic choices. The Basic Economic Questions   Nations must answer 3 basic economic questions when deciding to use their limited resources The way nations answer these questions define their economic system – – – What goods and services should be produced? How should the goods and services be produced? For whom should the goods and services be produced? What Should Be Produced?    Consumers decide what is to be produced through purchases made in the market place. Items that satisfy the customer’s needs and wants are purchased making the products successful Items that do not satisfy the needs and wants of the consumer are not purchased and are not successful How Should Goods and Services Be Produced?      How products will be produced is left up to the business Businesses must be competitive Businesses must produce quality products at lower prices than their competitors Businesses must find the best way to produce goods and services Businesses must also find the best way to encourage customers to purchase their products For Whom Should Goods and Services Be Produced?   Those individuals with the most money are able to purchase more goods and services To obtain money individuals work and invest