CHAPTER 2

Economic Systems

SECTION I

Answering the Three Economic Questions

The method used by a society to produce and distribute goods and services. The system used by a society depends on its goals and values.

I. Three Key Questions

A. What and should be produced?

B. How should goods and services be ______?

C. Who will ______these goods and services?

II. Economic Goals and societal Values

  1. Economic ______---Producing as many goods and

services as possible with the limited resources that is available.

  1. Economic ______---The right to make our own decisions about money, time and resources.
  2. Economic ______and ______---The belief that the government will provide for those who can not provide for themselves and that all the necessities for survival will always be available.
  3. Economic______---The method by which the economic system determines how and which productive resources are rewarded.
  4. Economic ______and ______---An economy must grow and innovate to increase the standard of living of its people and provide for a increasing population.
  5. Additional ______---Society may also value environmental protection, full employment, and universal medical.

III. The Four Major Types of Economic Systems

  1. ______Economy--- System that relies on rituals, habits, or customs.
  2. ______Economy---System where individuals make the economic decisions. Also known as free market or capitalism.
  3. ______Economy---System where a central authority or government makes all the economic decisions.
  4. ______Economy---Market based economy with the government playing a limited role in the decision making process.

SECTION II

The Free Market Economy

I.Circular Flow Chart Model of a Market Economy

A. ______---Persons who own the factors of

production and purchase products from businesses.

B. ______---Businesses that purchases the factors of

production from households and produce goods and

services.

  1. ______Market---Households purchase goods and

services from firms.

  1. ______Market---Firms purchase the factors of

production from households.

Section III

Central Planned Economy

(Command Economy)

I.______Control---The government owns the

factors of production and makes all the major

decisions.

  1. ______---Philosophy based on the belief that wealth should be distributed evenly throughout society.
  2. ______---Political system where power rest with a central government.
  3. ______---Best example of command economy.
  4. ______---Farms owned by government and leased to farmer to work.
  5. ______---All factories where state –owned and operated. Government determined products produced and salaries of workers.
  6. ______---Products usually in short supply and very poor quality.

SECTION IV

MODERN ECONOMIES

( MIXED ECONOMY)

I. Circular Flow Chart of a mixed Economy

A. ______in the ______Market---Role of government

is to tax firms and purchase the factors of production

from households.

B. Government in ______Market---Role of government is

to tax households and purchase from firms.

II. Characteristics of a Free Market Economy

  1. ______---All parties made decisions based on what is best for them.
  2. ______--companies compete with other companies that produce the same product for consumer’s dollars. Consumers compete with other consumers for products.
  3. ______---The combination of self-interest and competition continually adjust the prices in the market.

1