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The concept of scarcity and how it shapes economic systems by discussing the three basic questions societies must answer: what to produce, for whom, and the role of factors of production. The text also covers the impact of resources on economic activity and the categorization of economic systems, including command, capitalist, and mixed economies. Additionally, it touches upon the levels of economic activity and the differences between developed and developing countries.
What you will learn
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What choice will you make?
B uilding B ackground Everyone has wants. The decisions you make to satisfy your wants are economic choices. Economists say that all societies face a basic problem: people’s wants are unlimited. The resources to fulfill wants, however, are limited.
Scarcity and Resource Use The conflict between people’s unlimited wants and limited
everybody. In fact, scarcity forces individuals, businesses, and societies to answer three basic questions: What will be pro- duced? How will it be produced? For whom will it be produced?
To understand how societies answer these questions, economists
needed to produce goods and services. The four main factors of production are land, labor, capital, and entrepreneurship. These factors have one thing in common—their supply is limited. In economic terms, land includes all the natural resources found on or under the ground that are used to produce goods and services. Labor refers to the human time, effort, and talent needed to produce goods and services. Capital refers to the resources used to make and distribute goods and services. Tools, factories, roads, and trains are all forms of capital. Finally, entre- preneurship is the combination of vision, skill, and willingness to take risks needed to start businesses. If a factor of production is in short supply, problems can arise. Consider this example: a farmer uses skills (labor) and
1. Scarcity shapes how societ- ies use factors of production. 2. There are three basic types of economic systems. 3. Contemporary societies have mixed economies. 4. The United States benefits from a free enterprise system. 5. Geographers categorize countries based on levels of economic development and range of economic activities.
Geographers understand world economies by studying factors of production, economic activities, and levels of development.
scarcity, p. 117 factors of production, p. 117 free enterprise system, p. 121 agricultural industries, p. 122 manufacturing industries, p. 122 wholesale industries, p. 122 retail industries, p. 122 service industries, p. 123 developed countries, p. 123 developing countries, p. 124
Main Ideas
The Big Idea
If YOU lived there...
Use the graphic organizer online to compare economic systems.
SECTION
TEKS 3C, 8A, 8B, 8C, 9A, 9B, 9C, 9D, 10A, 10B, 10C, 15E, 21B
tools (capital) to grow strawberries on a farm (land), which he or she then sells at a market (role of entrepreneur). If a drought destroys farmland, the farmer might pro- duce fewer, if any crops. The farmer’s busi- ness would be hurt. Strawberries would be scarce. Consumers and businesses would likely have to buy them at a higher price.
The factors of production are not distrib- uted equally. For this reason, countries decide what to produce based on the resources they have. For example, South Africa is rich in gold, diamonds, and min- eral resources. Developing a mining indus- try has helped make South Africa one of the richest countries in Africa. The availability of resources also shapes how a society produces goods and services. For example, Rwanda’s economy is based on agriculture. Rwandans are rich in agri- cultural labor. In fact, about 90 percent of Rwandans work in agriculture. Farm- ers grow crops on small plots of land near their homes. In terms of capital, they have simple farming tools but few tractors and roads. By contrast, only about two per- cent of Americans work in agriculture. U.S. farmers rely heavily on capital. Using machinery and technology, they produce surplus crops on large farms.
When a resource is relatively scarce in one place, people may trade with others to get it. This happens within a society as well as between nations. In this way, scarcity contributes to economic interdependence. It is also a driving force behind international trade. For instance, Japan manufactures cars, which requires a great deal of steel. How- ever, Japan lacks the iron ore needed to make steel. To obtain iron ore, Japan has formed international trading relationships with Australia and Brazil.
R eading C heCk (^) Analyzing How does availability of the factors of production affect a society’s economy?
The availability of resources influences economic activity. Rwanda's agricultural economy relies heavily on a large number of workers.
By contrast, the availability of capital resources, such as combine harvesters, helps a small number of U.S. farmers tend large fields.
example, communist economies are clos- est to the command model. In a commu- nist economy the government owns all the factors of production. There is no pri- vate ownership of property and little or no political freedom. How do communist nations decide what, how, and for whom to produce? In countries such as North Korea and Cuba, the government collectivized, or took ownership, of the factors of production. Then government workers called cen- tral planners make long-term plans. They make all decisions about the production, price, and distribution of goods and ser- vices. They may even decide what types of work people are able to do.
By contrast, capitalist economies empha- size features of market systems. In capital- ist economies, individuals and businesses own the factors of production. They play a major role in answering the basic econom- ic questions and no central government authority tells them what to do. Consum- ers buy goods and services that they like best. Their choices push producers to make better products at lower prices. The economies of the United States, Canada, and Taiwan are capitalist. In these countries, government plays an important
but limited role in the economy. For example, in the United States, government agencies enforce health and safety stan- dards. These actions benefit U.S. workers and consumers but affect business plan- ning in complicated ways. Regulations can increase the cost of running a business. On the other hand, the government spends money that it collects in taxes on services that support economic development, such as education, roads, and social welfare pro- grams. Businesses save money by not hav- ing to pay for these services themselves.
The third type of economy falls between communism and capitalism. In socialist economies, the government controls some of the basic factors of production. In most cases, that control is limited to industries and services that are central to a nation’s well being, such as electrical utilities, com- munications networks, and healthcare. Other industries are privately controlled. Today, many nations with elements of a socialist economy, such as Sweden and India, have democratic governments. Still, central planners make decisions about government-owned industries. They also make decisions about other sectors, such as healthcare, to ensure that everyone has access to services.
Comparing Economic Systems Communism Socialism Free Enterprise Who owns resources?
Government Government owns basic resources; the rest are privately owned
Individuals and businesses
Who distributes resources?
Government decides how resources are used
Government regulates basic resources; market allocates privately owned resources
Market allocates resources
What role does government play?
Government makes all economic decisions
Government makes decisions in the basic industries
Government has a limited role, acting mostly to ensure market forces are free to work
The record of collective, or communist, non-free market economies, is poor. From the 1940s until the 1990s, between one quarter and one third of the world’s people lived under communist regimes. The for- mer Soviet Union and several of its Eastern European neighbors, China and much of Southeast Asia, Cuba, and North Korea all had centrally planned economies. The failure of these economies is due largely to the shortcomings of commu- nism. Often, central planners had too many decisions to make and too little understanding of local conditions. With wages set, workers had little incentive to work hard. Communism’s greatest failing, however, was the suffering that it caused. Shortages of food and goods were com- mon. Millions of people died building huge collective farms in China and the Soviet Union. Millions more were impris- oned for criticizing government policies. With the collapse of communism in the early 1990s, most communist coun- tries adopted some form of market econ- omy. Even the five communist countries that are left—China, Cuba, Laos, North Korea, and Vietnam—have adopted some features of market economies.
R eading C heCk (^) Comparing How are social- ist economies similar to both communist and capitalist economies?
The Free Enterprise System
U.S. capitalism is sometimes called the
Americans enjoy a number of freedoms. They are free to exchange goods and servic- es and choose careers. They are also free to own and operate enterprises, or businesses, with little government intervention.
Let’s take a look at one American who took advantage of these freedoms. In 2006 Eight-year-old Madison Robinson from Galveston, Texas, had an idea to sell light- up flip-flops for kids. With financing from friends and family, she started her own company, Fish Flops. By 2013 Fish Flops had over $1 million in sales, enough profit to cover Robinson’s college tuition. The ability to make a profit is one of the chief advantages of the free enter- prise system. In this system, profit can reward hard work and innovation. The desire to make a profit also encourages competition, forcing producers to offer higher-quality products at lower prices. Another advantage is that people often have greater freedoms in societies with free enterprise systems. They can own property, make economic decisions, and participate in open elections. Maintaining a functioning free enter- prise system requires people to act in a morally responsible and ethical way. Busi- nesses and individuals must obey laws, be truthful, and avoid behaviors harmful to others. Government regulations must be effective and fairly enforced.
At age eight, Madison Robinson started a business selling flip-flops that she designed.
directly to final consumers. For example, a furniture wholesaler buys tables from a manufacturer. Then the wholesaler sells the tables to a retail store, such as a depart- ment store, that sells directly to consumers. Still other tertiary workers, like health care workers and mechanics, work in
services rather than goods. Teachers, store clerks, and doctors are all tertiary workers. The fourth level of economic activity, quaternary industry, involves the research and distribution of information. People making a living at this level work with information rather than goods and often have specialized knowledge and skills. Architects, librarians, and scientists all work in quaternary industries.
Economic systems and activities affect a country’s economic development, or the level of economic growth and quality of life. Geographers group countries into two
basic categories: developed countries and developing countries. To decide if a coun- try is developed or developing, geographers use economic indicators, or measures of a country’s wealth. One indicator, gross domestic product (GDP), is the value of all goods and services produced within a country in a single year. Another indicator is a country’s per capita GDP, or the total GDP divided by the num- ber of people in a country. As you can see in the chart, per capita GDP allows us to compare incomes among countries. Other indicators include literacy and life expec- tancy and the overall level of industrializa- tion. We also look at the types of industries a country has and at its level of health care and education.
Many of the world’s wealthiest and most
countries with strong economies and a
Australia Afghanistan
Per Capita GDP (U.S. $): $43,300 Per Capita GDP (U.S. $): $1, Life Expectancy at Birth: 82 Life Expectancy at Birth: 50. Literacy Rate: 99% Literacy Rate: 28% Physicians Per 10,000 People: 39 Physicians Per 10,000 People: 2
Contrasting How does the quality of life in Afghanistan differ from that in Australia?
A Developed and a Developing Country
ONLINE QUIZ
high quality of life. Developed countries like Germany and the United States have a high per capita GDP and high levels of industrialization. Their health care and education systems are among the best in the world. The world’s poorer nations are known
less productive economies and a lower quality of life. Almost two-thirds of the world's people live in developing coun- tries. These countries have a lower per cap- ita GDP than developed countries. Most of their citizens work in farming or other pri- mary industries. Although these countries typically have large cities, much of their population still lives in rural areas. People in developing countries usually have less access to health care and technology. Gua- temala, Nigeria, and Afghanistan are all developing countries. Often, a country’s economic activi- ties reflect its economic development.
In the poorest developing countries, the vast majority of people work in primary industries, such as farming. As a country becomes more developed, fewer people work in primary industries. In the mid- 1800s about two thirds of U.S. work- ers worked in primary activities. Today, 80 percent work in tertiary industries, including wholesale, retail, and service industries. Only three percent of Ameri- cans work in primary industries.
R eading C heCk (^) Analyzing How does GDP differ in developed and developing countries?
S Ummary and Preview In this section you learned about the economic activi- ties, systems, and levels of development that characterize societies today. In the next chapter you will learn about citi- zenship in various countries.
1. a. Describe What are the factors of production? b. Predict What problems might a homebuilder face if one of the factors of production, such as land or labor, was in short supply? c. Explain Identify and explain an example of how the relative scarcity of resources might impact economic interdependence within a country. 2. a. Compare Who makes the economic decisions in a traditional economy? Compare this with market and command economies. b. Evaluate What explains the record of collective, non-free market economies in the world today? 3. a. Identify What are the advantages of the free enterprise system? b. Analyze how can unethical and immoral behavior hurt the free enterprise system? 4. a. Define Describe and give examples of agricul- tural, wholesale, retail, manufacturing, and service industries.
b. Explain What are developed and developing countries? Include examples of economic indicators in your answer. c. Analyze how might economic factors affect the use of technology in a developing country?
5. Comparing Use your notes to complete a chart like the one below comparing economic systems. For each system, list how some societies organize the production and distribution of goods and services.
Free Enterprise Socialist Communist
6. Describing Economic Systems Use your notes on economic systems to write your article. Be sure to include definitions of different economic systems as well as details on the United States and rwanda.
Focus on Writing