Basic Economic Concepts Presently, nearly every nation in the world has a free-market or mixed economy that combines the benets of having private ownership with some level of governmental oversight. Still, all nations' economies are meant to produce prots. There are numerous factors that can affect a nation's economy. In fact, economic and factors of production need to be taken into account not only for current economic events, but also for future trends; thus, they are key elements when governments plan their economic policies, labor laws, taxes, and even interest rates. A very important economic factor is the \"scarcity value." Scarcity increases the value of a product or service. In other words, as long as what is being produced {the resource} is rare, or being produced in small numbers, the producer can maintain or increase the price for the resource. There are four types of resources that are used in the production of goods and servicesalso known as factors of production: LaborlHuman: the humans making and selling the product Land/Natural: the materials available to make the product Capital: the money available to create a business or produce a resource Enterprise: the businesses that create, distribute, or sell the product These human, natural, capital, and enterprise factors of production are limited, or scarce, but society tends to have unlimited wants. Allocation of scarce resources is one of the basic economic problems faced by nations around the world, and it defines a nation's economic system. In traditional economies, the community or elders decide how to utilize these resources. In command economies, the government decides. In free and mixed economies, individuals or private businesses, inuenced by the forces of supply and demand, decide. Scarcity also dictates a nation's international relations. In fact, scarcity of a product or a service forces trade-offs and creates opportunity costs. In other words, nations must accept compromises and the loss of other possible sources of revenue when choosing to produce a particular good or service. For example, Saudi Arabia is rich in oil a natural resource that is scarce in many other nations of the worldbut poor in water and, subsequently, poor in farmland. Consequently, in 2015, Saudi Arabia used a big part of the profit obtained selling its oil to buy thousands of acres of farmland in the southwestern United States. This is an indication of how interconnected the world's economies are, and how scarcity is a guiding factor in a nation's foreign economic policy. Three Types of Economic Systems Historians have identified three different types of economic systems that have developed to answer the economic problem. Each of these three still exists in some form today, but few ifany economies are a pure form of any of the three. The three types of economies are: 1. traditional 2. command 3. market Traditional Economy Long before what we call the advent of modern civilization, men and women lived together in a simple social order. In North America, over 400 different native tribes roamed the continent, each with its own political and economic system. The economies of most of these tribes ranged from gathering food to hunting, fishing, and farming, or some combination of the three. In some isolated parts of South America, Australia, Africa, and Asia, some tribes still live much as they did thousands of years ago. Economic decisions in such an economy are governed by a series of rituals or ways of doing things handed down from one generation to the next, usually from father to son, or from mother to daughter. The decision of who does what, known as the l'division of labor," was usually but not always determined by gender: men hunted and fished, while women stayed home, tended the fire, raised children, and cultivated crops. Leaders might be excused from certain economic activities and given a larger share of the hunt or the harvest in exchange for practical advice or spiritual guidance. To this day, the bushmen in the desert of South Africa divide an animal killed in the hunt thus: the two hind legs go to the successful hunter; other adult members of the hunting party get the feet, back, and stomach; and the younger boys have to be satisfied with the intestines. However, in the feast that follows the hunt, the hunter is expected to divide his larger share with those not as fortunate, so eventually all get enough to eat. Aspects of a traditional economy also affect the way more complex societies function. Under the centuries- old caste system still in force in parts of India, each man does the same work as his fatherwhether his father was a carpenter, soldier, merchant, government official, or garbage collector. Women are not allowed to marry out oftheir parent's caste. In the preCivil War American South, African Americans were slaves. Once their bondage was ended, they were relegated to low-paying jobs not wanted by whites, separate and inferior schools, ghettoized neighborhoods, and the backs of public buses. In most of the world, tradition has long dictated that women could fill only well-denedI social roles associated with child- bearing and -rearing, cooking, and other household tasks. Until recently, women in the U.S. did not fight in combat, attend military schools, become ministers, carpenters, or major-league umpires. In some countries, women must wear veils to cover their heads and bodies and are not allowed to drive cars or to work outside of the home. Command Economy Another way of solving the economic problem also has also existed for thousands of years. This method had its origins in the ancient city-states of Central and South America, the Near East, Africa, and Asia. For a number of complex reasons, people in these areas were able to raise crop surpluses that then often fell into the hands of small groups of warriors, nobles, kings, and priests who constituted the government and gave the commands. The command economies of antiquity resulted in the labor of hundreds of thousands in Egypt to build the pyramids, and in China to construct the Great Wall. Later in Europe, laborers built magnificent cathedrals in very modest towns. Though we admire the achievements of these inspired builders, we might shudder to think of the years of forced labor and suffering inflicted by a small ruling class simply to build a tomb for a pharaoh or a place for the masses to worship. Command economies have also been forced on modern man. One need only think ofthe Soviet Union and Communist China. Under Stalin, the Soviet Union built a war machine that eventually defeated Nazi Germany's and afterwards engaged the US. in a struggle for military superiority. However, neither the Soviet Union nor Communist China was able to match the ability of the West in providing the average person with consumer goods. As a result, pure communism failed in both these countries, and they are now building a stable economic order increasingly based on a market economy. Market Economy Market Economy The third way of making economic decisions has been instituted in the U.S., for example, as a market economy. Market economies are at times (favorably) called a \"free enterprise\" system and at others (unfavorably) labeled "capitalist.\" in its ideal form, all economic decisions in a market economy are made through interactions between consumers and producers. Under a completely free market economy, what is produced, how much is produced, and for whom it is produced are determined solely by those who make these items and those who consume them. A market economy has increased innovation as individuals and companies both look to create new products and technologies to gain an edge on their competition and make more money. The producers and the buying public decide whatever people want to buy, whether the items are Barbie dolls, bibles, bananas, or basketballs. The market decides how many people become lawyers and how many decide to deal in cocaine. The market determines how much farmers produce and how much doctors are paid. The U.S., of course, does not have a completely free market economy. Government makes many decisions that affect the market. For example, it taxes alcohol and tobacco to discourage consumption; it gives students loans to encourage education; it pays for roads to allow people to use their cars; and it regulates prices, pays subsidies, imposes tariffs, and decrees minimum wages and maximum working hours. In these ways the U.S. still operates as a command economy. But even the commands given by the government often operate through the market, encouraging one kind of activity {such as education) and discouraging another (such as smoking cigarettes). The story of how the modern market system developed in the Western world is the story of the history of economics. We will not bore you with the details, but let it be understood that the first markets developed in medieval times, when peasants took the little produce not owed to their lords or needed to feed themselves, and sold it in an early form of farmers' markets. Towns gradually grew around these marketplaces, and people began to specialize in making certain products (shoes, clothes, baskets, pottery, jewelry, etc.). Similar activities took place in ancient times, but in western Europe these early markets grew and developed. With the invention and application of machinery and steam power, markets expanded, barriers to trade collapsed, banks developed, and trade became more and more important. Before the end of the eighteenth century, Europeans traveled the world over in search of raw materials and markets, and the free-enterprise system expanded. Today the power and the efficiency of the market has displaced the older societies based on command economies, and capitalism in one form or another has become the dominant form of economic organization. The powerful market forces that now control most of the world affect the economies in even the most remote villages in Africa, the Middle East, Asia, and South America. Recreated by Secondary Social Studies, adapted from Active Classroom 2022