CP Economics
Unit 2: Economic Systems
Study Guide Problem Set #1
1. General Background
a. What is an economic system?
b. List the three basic economic questions that all societies must answer.
2. Define each of the following broad social goals:
a. Economic efficiency
b. Economic freedom
c. Economic growth
d. Economic stability
e. Economic equity
f. Economic security
3. Characteristics of Economic Systems: Answer each of the following in a short paragraph.
a. What characterizes a command economy in terms of the three basic questions? Which
goals are the highest priorities in a command economy? Which social goals are hardest
to achieve in a command economy?
b. Characterizes a market economy in terms of the three basic questions? Which goals are
the highest priorities in a market economy? Which social goals are hardest to achieve in
a market economy?
CP Economics
Unit 2: Economic Systems
Problem Set Study Guide #2
SSEF4 – Contrast the different economic systems.
SSEMI1- Illustrate by means of a circular flow diagram the flow of goods, services, and money
between households and businesses.
1. Command Economies
a. Why are command economies also called centrally-planned economies?
b. In 3-5 sentences, discuss why many command economies, such as the former Soviet
Union, experienced severe economic problems.
2. Market Economies
a. How are resources, goods and services allocated in a market economy?
b. Explain the role of the “invisible hand” in a market economy.
c. Define each of the following and explain their importance in a market economy.
i. Private Ownership
ii. Profit Motive
iii. Consumer Sovereignty
iv. Competition
3. Circular Flow of a Market Economy
a. Explain the role of each of the following in the circular flow.
i. Households
ii. Firms
iii. Product Market
iv. Factor or Resource Market
v. Monetary Flow (Money)
b. Construct a circular flow model labeling each of the following parts.
i. Households
ii. Firms
iii. Factors of Production
iv. Monetary Flow (Income)
v. Goods and Services
vi. Monetary Flow (Products)
vii. Factor Market
viii. Product Market
CP Economics
Unit 2: Economic Systems
Problem Set Study Guide #3
SSEF5 – The student will describe the roles of government in a market economy.
1. When government gets involved in a market, what type of economic system is created? (1
point)
2. Redistribution of Income (5 points)
a. Which of the broad social goals is a society trying to reach when the government
redistributes income? (2 points)
b. Identify three ways the government redistributes income. (3 points)
3. Protecting Private Property Rights (6 points)
a. What is the difference between physical and intellectual property? (1 point)
b. What is the primary reason for government protecting intellectual property? (1 point)
c. Explain why pharmaceuticals are so expensive. (2 points)
d. Why would it be good to assign ownership to endangered animals? (2 points)
4. Market Failures (Externalities) (9 points)
a. What is an externality? (1 point)
b. Why is an externality a market failure? (1 point)
c. Give an example of a positive externality. (1 point)
d. What might government do to encourage positive externalities? (1 point)
e. Give an example of a negative externality. (1 point)
f. What might government do to encourage negative externalities? (1 point)
g. In 3-5 sentences, discuss how government can step in to mitigate the negative
externality of second-hand smoke. (3 points)
5. Regulation and Deregulation (6 points)
a. What is regulation? (1 point)
b. What is deregulation? (1 point)
c. What are the effects of regulations on businesses? (2 points)
d. What are the effects of regulations on consumers? (2 points)
6. Providing Public Goods and Services (7 points)
a. What is the free rider problem? (1 point)
b. What characterizes a public good? (2 points)
c. Give two examples of public goods. (2 points)
d. Why might government seek to tax everyone to provide a service as a public good? (2
points)