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Chapter 2. Economic Systems. Answering 3 Economic Questions. Section 1. In your own words define the following terms and give an example of each. Producer Consumer Product Market. Bell Ringer. Identify the three economic questions

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Chapter 2

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Chapter 2

Chapter 2

Economic Systems

Answering 3 economic questions

Answering 3 Economic Questions

Section 1

Bell ringer

In your own words define the following terms and give an example of each.





Bell Ringer

Learning objectives

  • Identify the three economic questions

  • Analyze the societal values that determine how a country answers the three economic questions

  • Explain the characteristics of traditional, command, and market economies and describe the societal values that influence them.

Learning Objectives

Chapter 2

Economic System

  • The method used by a society to produce and distribute goods and services

What are the 3 questions

  • What should be produced?

    • National defense?/education?/public health?/welfare?/consumer goods?

  • How should products be produced?

    • Solar power? / nuclear power? / oil? / family farms? / corporate farms?

  • Who will consume products?

    • Who gets what? BMW v. Ford

What are the 3 Questions?

Chapter 2


  • Love of one’s country; passion that inspires a person to serve his or her country

Chapter 2

Safety Net

  • Government programs that protect people experiencing unfavorable economic conditions

Economic goals

  • Efficiency

    • Making the most of limited resources

  • Freedom

    • Patriotism

  • Security & Predictability

    • Safety net

      • Natural disasters, welfare programs, social security,

    • Goods available when needed

Economic Goals

Economic goals continued

  • Equity

    • Fair distribution of wealth=$4=work

  • Innovation & Growth

    • Innovation → Growth → higher standard of living

    • Innovation = inventing new ideas

  • Other Goals

    • Example: Environmental Protection

Economic Goals Continued

Chapter 2

Standard of Living

  • Level of economic prosperity

Types of economies

Create a Venn Diagram comparing different systems

  • Traditional

  • Market

  • Command

  • Mixed

Types of Economies


Chapter 2

Traditional Economy

  • Economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services

Traditional economy

  • Based on

    • Customs

    • Habits

    • Rituals

  • Sons follow in fathers footsteps & daughters follow in mothers footsteps

  • Very little innovation/growth/change

  • Examples: Amish, American Indians, Eskimos

Traditional Economy

Chapter 2

Market Economy

  • Economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

Market economy

  • Focused on the individual

  • Uses trading

  • Lots of innovation/growth/change

  • Example: Hong Kong, Singapore

Market Economy

Chapter 2

Command Economy

  • Economic system in which the central government makes all decisions on the production and consumption of goods and services

Command economy

  • Government controls everything & makes all decisions for everyone

  • Very little innovation/growth/change

  • Examples: Soviet Union, North Korea

Command Economy

Chapter 2

Mixed Economy

  • Market-based economic system with limited government involvement

Mixed economy

Best of All Economies!!

  • Government has limited role

    • Varies from economy to economy

  • Focuses on individual

  • Examples: United Kingdom, United States, Canada

Mixed Economy

Free market

Free Market

Section 2

Bell ringer january 12

Name and describe two types of economies discussed yesterday.

(without your notes if possible)

Bell RingerJanuary 12

Learning objectives1

  • Explain why markets exist

  • Analyze a circular flow model of a free market economy.

  • Understand the self-regulating nature of the marketplace.

  • Identify the advantages of a free market

Learning Objectives

Chapter 2


An arrangement that allows buyers and sellers to exchange things

Chapter 2


Concentration of the productive efforts of individuals and firms on a limited number of activities

Why do we need markets

No one makes everything they need/want

  • Specialization

Why do we need MARKETS?

  • Efficiency of resources

Players in free market

Page 30 in your book!





Purchase F of P

Use resources to produce products & services

  • Own F of P

  • Purchases products & services

Players in Free Market

Chapter 2

  • Adam Smith - 1776

    • Scottish philosopher/entrepreneur

    • Wrote: The Wealth of Nations

Invisible hand

“An economy is made up of countless individual transactions. In each transaction, the buyer & seller consider only their self interest or personal gain.”

  • Self-interest

    • One’s own personal gain

    • Motivating force of Free Market

Invisible Hand

Chapter 2

  • Competition

    • Struggle among producers for consumers’ business

    • Regulating force of Free Market

      Self-interest + Competition =

      Invisible Hand

Chapter 2

What keeps prices from skyrocketing?

What causes competition?

How can incentives be positive or negative?

Free market pros cons

Free Market Advantages:

  • Economic Efficiency

  • Economic Growth

  • Economic Freedom

  • Endless Variety of Goods & Services

    Free Market Disadvantages:

  • Cannot address public needs/goods

    • Military / Roads / Libraries / Parks

  • Economic Equity

Free Market Pros & Cons

Bell ringer january 13th

  • What if you didn’t have a choice in your job profession…you couldn’t decide what you wanted to do after high school – the government decided for you.

  • Would you like that? Why or why not? What would be some advantages and/or disadvantages?

    Please write complete sentences in a short paragraph.

Bell RingerJanuary 13th

Bell ringer january 17th

Create a Web diagram centered around the word “Dictator”

Bell RingerJanuary 17th

Command economy centrally planned economy cpe

Command EconomyCentrally Planned Economy (CPE)

Section 3

Learning objectives2

  • Describe how a centrally planned economy is organized

  • Analyze the centrally planned economy of the former Soviet Union

  • Identify the problems of a centrally planned economy

Learning Objectives

Chapter 2

Command Economy:

System in which the central government makes all decisions

Cpe structure

  • Central Government

    • Answers Economic Questions: What to produce, how to produce, & who gets what

    • Everyone answers to the central govt.

      • People have no freedoms

      • Businesses are created by govt. only to provide what is needed

CPE Structure

Cpe atmosphere

  • Govt controls all factors of production

    • People are told where and when to work

    • No person or business owns land

    • All physical capital is provided by the govt in rations.

    • Factories are told how much product to produce

    • There is no push for efficiency or profit

CPE Atmosphere

Socialism communism

- Democracy

  • What is socialism?

    • A philosophy based on beliefs that democratic means should be used to evenly distribute wealth throughout society

  • What is communism?

    • A political system in which the economy & all economic and political power rests in the hands of the central government

  • Are these the same? How are the different?

Socialism & Communism

- Authoritarian

Cpe problems

  • Discourages innovation

  • Poor quality of goods & services

  • Shortages of goods & services

  • Diminishing production

  • Ideals are better than the reality

CPE Problems

Mixed economies

Mixed Economies

Section 4

Why mixed economy

  • Why do we need mixed economies?

    • No economic system has all the answers!

    • Government intervention has become a greater need in order to provide certain services

      • National defense; roads/highways; libraries

Why Mixed Economy?

Government s role

  • Government creates laws to protect property rights, enforce contracts and patent laws

    Can you think of other reason to have government?

Government’s Role

Circular flow free market






Buy F of P

Produce goods & services

  • Own F of P

  • Buy goods & services

Circular Flow – Free Market

Circular flow mixed





Buy F of P

Produce goods & services


  • Own F of P

  • Buy goods & services

  • Buy F of P

  • Buy goods & services

  • Provide goods & services through taxes on both Households & Firms

Circular Flow - Mixed

Chapter 2

So how does all this fit together?

  • Traditional- Command

  • Free Market- Mixed

  • How do these systems differ?

  • How are they similar?

  • Which goals do these economies achieve?

  • Which economies meet which economic goals

    Which Economies Meet Which Economic Goals?

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