WHAT ECONOMICS IS ABOUT

Lesson
Economics will be defined and four different types of economies will be discussed.
Several economic terms will be defined and discussed.
Objectives
The student will:

Explain what an economy is

List and give examples of productive resources
Discuss a variety of economic terms
List the three basic economic problem questions
Identify the type of economy that exists in a country
Describe the role of a countrys leadership in the different types of economies
Describe characteristics of each of the four types of economies

Procedure
Going to school, eating (even if you make a sandwich at home), having a place to live,
talking on the telephone, and seeing a movie all require money. In fact, everything we
have or do costs money. As we learned earlier, our government promises to honor our
currency. One of the ways it ensures that our money keeps value is by monitoring and
protecting the stability of our economy. An economy is a system for managing,
developing, and using resources.
Scarcity
Every society is endowed with resources which are used to produce the goods and
services that enable it to survive and prosper. These resources, called productive
resources, can be classified into three groups: natural resources, human resources,
and capital resources.

Natural resources (often called land) refer to resources such as coal, water,
trees, and land itself. Raw Materials used in production come from natural
resources.
Human resources (labor) describe the human work effort, both physical and
mental, expanded in production.
Capital resources are the man-made physical resources (such as buildings,
tools, machines, and equipment) used in production.

The study of economics explains how productive resources are used to provide the
goods and services that satisfy human wants. Because productive resources are
limited, the goods and services that can be produced from them are also limited. In

contrast, the goods and services wanted by individuals and societies are virtually
unlimited.
This tension between unlimited wants and the limited productive resources available for
satisfying these wants is what economists refer to as scarcity. Thus, stereos, hot dogs,
education, lawn mowers, T.V. repairs services, and bubble gum are all considered
scarce because many individuals desire these things, but their availability is limited.
Scarce goods and services command a price in the marketplace. The price indicates
how scarce a good is relative to other goods. A good with a high price is relatively more
scarce than a good with a lower price.
It is quite difficult to think of things that are not scarce. (Ask students if they can think of
something not scarce). Some examples might include sand and water at the beach or
the air you are breathing at this moment. But even air is scarce to a scuba diver or
astronaut; and certainly air is scarce for the inhabitants of urban areas. It is safe to
conclude that in economics, most things in this world are considered scarce. They are
not freely available to individuals in unlimited quantities.
Scarcity is sometimes confusing to students because it does not correspond exactly to
the common usage of the word. Are hot dogs and candy really scarce? They are
readily available to most students, who would more likely apply the term to diamonds
and gold.
Offer a free piece of candy to the class. It is a safe bet that more than one student will
want it, and the point is proved: in economics, if individuals want more of an item than
is freely available, then that item is considered scarce, and will command a price in the
marketplace.
The Basic Economic Problem
The existence of scarcity creates the basic economic problem faced by every society,
rich or poor: how to make the best use of limited resources to satisfy human wants.
To solve this basic problem every society must answer these three basic questions:
1. What goods and services will be produced?
2. How will goods and services be produced?
3. Who will consume the goods and services?

How Do I Know What Kind Of Economy Is In Place?

Several fundamental types of economic systems exist to answer the three questions of
what, how and for whom to produce: traditional, command, market, or mixed.
Can you guess by the names what roles governments might play in each system?
What about the types of roles played by individuals?

What Is A Traditional Economy?

The simplest type of economy is a traditional economy. Countries with tribes or
strong religious leaders often have traditional economies because these leaders
normally control resources like land. Frequently, other property belongs to everyone in
the family or clan. Decisions regarding the well being of the community are made by
respected leaders to comply with religious principles.
In such situations, money and jobs can both be rare. Change happens very slowly
because leaders prefer to follow the traditions that been successful for them for
centuries.
One advantage to living within a traditional economy is that all of the strict rules ensure
that it remains very stable. If you lived in a traditional economy, your life would probably
be defined by the type of work your parents did. Hopefully you would have been born
into a wealthy family so that you would be able to enjoy modest comfort. You would
simply continue the family business and barter to get enough food or supplies and the
blessings of the religious leaders.
Poor families in traditional economies usually receive no help from others because it is
believed that being poor is simply their responsibility in life.
Traditional economies are very rare today. They primarily exist only in remote areas of
Asia and Africa.

What Is A Command Economy?

Countries with strong governments instead of religious or tribal leaders frequently have
command economies. In this second type of economy, people still have very little
individual freedom.

Dictators, kings, or other powerful political figures decide how to control their
economies. They believe that average citizens are not able to make decisions about
what should be produced, who should produce it, and who can buy what. The countrys
leaders plan for the economy and make all of the decisions about who should get what
products.
The advantage to living within this system is that it is supposed to be easier for people.
Decisions are made by a central group of planners who are supposed to plan the
economy based on the needs of the entire country. People can concentrate on other
issues because they do not have to try to get ahead or learn about what goes into
making the products they buy. Does this sound easier to you?
If it does, then think about the other characteristics of a command economy. Not having
to work hard means that people do not have the incentive to develop new products or
technologies. New thinking is not encouraged. Also, because a few people are
responsible for the entire economy, sometimes the needs of many individuals are not
met.
In a command economy, you would not be able to choose designer clothes over simply
made functional ones. The leaders of the country would probably have already decided
for you that it was a waste of money. They would want you to spend what little money
you had on more sensible things.

Command economies are in the minority today. Cuba, North Korea, and Saudi Arabia
are a few examples.
Think About This:
1. If you moved to a country that had a traditional economic system, how would you
be able to find a place to live?
2. How would you feel about having someone you didnt know make decisions
about what you could buy? Would you work hard to succeed?
What Other Kinds Of Economies Exist?
Now that most countries have frequent interaction with each other, traditional and
command economies are becoming rare. For that reason, we must learn more about
two other kinds of economies.
What Is A Market Economy?
A market economy is defined as one whose system of producing and exchanging
goods and services is controlled exclusively by private individuals. Governments play
absolutely no role in a market economy. The economy runs itself based on the buying
and selling decisions of individuals.

This type of economy has the most advantages of any economy covered so far. People
are free to choose what products they want or what jobs to hold. In theory, a market
economy strives to stay healthy.

In reality, it is likely that in the process of staying balanced, a market economy may
actually fluctuate dramatically. It is very unstable. During good times the stock market
is strong, employment is high, and businesses are profitable. However, due to the
unpredictability of a market economy, the climate could change suddenly with harsh
consequences. During bad times the stock market drops, unemployment rates soar,
and businesses fail.
The biggest disadvantage is that people who have little or no income must struggle to
meet basic survival needs. People who are not working may suffer greatly.
Because of the significant disadvantages associated with a market economy, it does not
exist anywhere in the world! No country is willing to risk the well being of its people to
try it.
What Type Of Economy Do We Have?
Without some control by experts, an economy is too unpredictable. What exists in most
countries today is called a mixed economy.

We have all of the individual freedoms associated with a market economy but the
government tries to control enough of the economy to protect it from getting out of
control.

Individuals control the resources and make most of the economic decisions. We have
the right to buy and sell almost anything at whatever price we choose. Our economy is
based on the principles of competition and freedom.
Manufacturers compete to get you to buy their products. By choosing one kind of soda
over another, you ultimately give your money to that company instead of another. By
purchasing the soda, you also choose not to spend your money on some other type of
product. You cannot buy a new shirt if you spend that money on something else.
Still, with a mixed economy, you have the freedom to make that decision on your own.
You have the freedom to own land and property, freedom to make a profit, and freedom
to exchange goods and services as you see fit. What kinds of things do you like to buy
that your parents would not buy for you? Do they want you to spend less for jeans or
shoes than you do? By allowing you to use your money from a job, they have created a
mixed economy in your house.
That freedom, on a much larger scale, is protected by our government as one of the
ways of controlling our economy. If you own a house or a car, no one is allowed to
come and take it away for no reason. You have a choice of what to buy at the grocery
store or the shoe store.
Think about the snacks and sodas you can buy. The right to make, sell, and buy them
only exists because we have a mixed economy. The economy runs itself through the
buying choices people make. No one can tell you that you cannot buy it, even if you do
not need it or it is not good for you. You get to make the choice.
Along with all of the freedom is quite a bit of responsibility. As individual citizens, we
must get jobs and earn money in order to have the things we want and need. We have
to know enough about the things we buy in order to know if they meet our needs. That
involves research and learning to make sure we make the right choices for ourselves.
You cannot have freedom without responsibility in a mixed economy. For instance, you
have to have a job to pay for things, but you get to choose the kind of job you want. You
can buy flip flops running shoes, or heels, but you have to know which one is best for
you and which one you like the most. You can have a cell phone but you have to pay
for it.
The role our government plays in the economy is what makes it a mixed economy. It
protects our freedom. Laws regulate illegal business practices and uphold safety in the
workplace.
There are also numerous social and public programs in place. Government assistance
helps people who are not working by ensuring that they can afford to have a place to
live, food to eat, or even health insurance.
The government supports all fire and police departments, road construction agencies,
schools, and libraries. National defense is a top priority in protecting our freedoms from
people who might want to take them away.

Most countries have mixed economies. Each government is involved in its countrys
economy to a different degree, depending on the philosophy of that country.
Think About This:
1. Why do you think governments do not allow their countries economies to be
market economies?
2. Would you rather live in a different kind of economy than the one you live in? If
so, which kind?
Project
Pretend that you have just been elected president of the United States. You are the
first person from your neighborhood to make it into politics and you have a lot of people
at home watching you to see how well you can make it among other politicians. Answer
the following questions, remembering to keep in mind the principles of a mixed
economy.
1. What economic problems would you try to fix first? Why?
2. Explain how you would go about fixing the problems that you felt existed.
3. List some of the good features that you would try to improve upon under a mixed
economic system.
Opportunity Cost: Theres No Such Thing as a Free Lunch!
Because of scarcity, any time a choice is made there are alternatives that are not
chosen. More precisely, there is always one next best alternative that is not chosen. In
economics, the value of the next best alternative is called opportunity cost.
Both producers (those who provide goods and services) and consumers (those that
use goods and services) incur opportunity costs when making decisions. For example,
the business person who uses a building to operate an insurance business cannot use
the same building to produce pizzas. The consumer who uses scarce income to
purchase a new carpet will have to forgo saving the money or purchasing something
else. Because there are always alternative uses for limited resources, every economic
decision has an opportunity cost.
A major goal of economics instruction is teaching students to recognize and evaluate
opportunity costs when making decisions. As consumers, students should realize that
the cost of buying an item is not really its price; rather, it is the most valued item that
now cannot be bought. For producers, the opportunity cost is the next most valuable
good or service that is not produced as a result of the decision to produce something
else.
The concept of opportunity cost also relates to the use of time. Since time is scarce,
the time spent doing one activity cannot be spent doing another. Thus, the real cost of

watching television is not the time itself, but the most valuable other activity that could
be done during that time.
The inescapable conclusion to this discussion is that there is, as the economists tell us,
no such thing as a free lunch. All resources are limited and have alternative uses.
Every economic choice has an opportunity cost.