Micro CHAPTER 1.2:

CHAPTER SUMMARY

Every economic system has to answer three questions about the goods and services it produces: What will we make, how will it be made, and who will get it? The way we answer these questions is known as a system of resource allocation (aa-low-cay-shin) - how we choose to use or give out resources. There are three types of systems that each answer these questions differently:

1) Command Economy - Economic decisions are made mostly by government leaders.

2) Market Economy - Economic decisions are made mostly by individuals and businesses. We sometimes say that they are guided by the "Invisible Hand" - a metaphor for the unseen forces that allow people to organize themselves in very complicated ways to produce things for each other.

3) Mixed Economy - Economic decisions are made by both government leaders and individuals and businesses.

These are the types of systems that are common in whole nations today, but some places maintain a Traditional Economy, in which economic decisions are based on the way things have always been done - this is mostly in small tribal communities.

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EXTENSION