Chapter 5

What is the Economic Problem?

National Economic Goals
• Goal #1: Low level of Unemployment
• People who want jobs can find them
• Helps prevent poverty and crime
• Goal #2: A Stable Price Level
• An unstable price makes it difficult for businesses to predict future profits which slow
economic growth
• Goal #3: A healthy rate of economic growth
• Economic Growth
• An increase in the quantity of goods and services produced
• Extensive growth
• Growth due to more land, labor or financial capital
• Intensive growth
• Growth due to more efficient use of current resources
• Goal #4- A fair distribution of Income
• The government must decide if it should provide a safety net or if the market should
run its course
Three Economic Questions
• What will the nation produce?
• Consumer goods
• Goods purchased for individual use
• Capital goods
• Goods that firms use to produce other goods
• Consumer goods/capital goods tradeoff
• A nation must decide how to balance the production of these two
• Command Economy solution
• A powerful individual or committee decides what the nation will produce
• Market Economy solution
• Individual or the market decided what will be produced
Three Economic Question
• How will the nation produce its goods?
• Labor intensive
• Relies more on human labor than capital (machinery)
• Advantages
• More adaptable labor, workers can be trained, workers can be hired or laid off based on
profitability of the company
• Capital Intensive
• Relies more on automated equipment than human labor
• Advantages
• Consistent production, Smaller hidden costs such as benefits, No labor unrest
• Command economy solution
• Usually lean toward labor intensive so that more people have jobs
• Market Economy solution
• Each firm considers its unique needs and acts as efficiently as possible
Three Economic Questions
• Who will receive what the nation produces?
• Command Economy solution
• Egalitarian fairness
• Each person has a right to a part of the nation’s wealth because they are a part of the human
race
• Economic leveling
• Equally distributing the nation’s pool of wealth to all its citizens regardless of individual
contribution to income
• Increase taxes on the wealthy to redistribute wealth
• Market Economy solution
• Libertarian fairness
• The only government involvement should be to ensure the right to own and use property free
of government interference
• Can be referred to as “economic Darwinism”