Chp. 3: Economic Systems
Objectives
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EPF.1 The student will demonstrate knowledge of basic economic concepts and
structures by
e) comparing the characteristics of market, command, traditional, and mixed economies
f) identifying Adam Smith and describing the characteristics of a market economy
Essential Understandings
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1. A variety of methods can be used to allocate goods and services. People acting
individually or collectively through government choose which methods to use to
allocate different kinds of goods and services.
2. People in all economies must answer three basic questions: What goods and
services will be produced? How will these goods and services be produced? Who will
consume them?
3. National economies vary in the extent to which they rely on government directives
(central planning) and signals from private markets to allocate scarce goods,
services, and productive resources.
4. Adam Smith, author of The Wealth of Nations, is often called the “father of
economics.”
5. A market economy has certain basic characteristics including private ownership of
resources, prices determined in markets, competition among businesses, consumer
sovereignty, profit motive, and limited government.
Essential Questions
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1.
2.
3.
4.
What are the three basic economics questions?
How does each type of economy answer the three basic economic questions?
What were some of Adam Smith’s economic theories?
What are the characteristics of a market economy, and why is each important?
Preview
Cartoon Analysis
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Title
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Where are the people in each cartoon
Who or what decides what consumers get in Cartoon A?
Cartoon B?
What advantages and disadvantages do you see
represented in Cartoon A?
Cartoon B?
Which store would you prefer to shop in, and why?
Three Basic Economic Questions
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1. What goods and services are to be produced?
2. How are goods and services to be produced?
3. Who will consume these goods and services?
Economic Goals Societies Must
Address
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1. Economic Freedom – the ability to make our own economic
decisions without interference from the government
2. Efficient Economy – strives for full employment – when all who
want to work can find jobs, because unemployed workers are a
wasted resource
3. Economic Equity – fair and just distribution of a society’s wealth
4. Economic Growth – characterized by scientific and
technological innovation
5. Economic Security – providing less fortunate members of a
society with necessities such as food, shelter and health care
6. Economic Stability – goods and services we count on are there
when we want them
Matrix of Economic Systems
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What to produce? How to produce
Comman
d
Tradition
al
Market
For Whom to
produce
Goals
Country
Examples
Matrix of Economic Systems
p. 014
What to produce? How to produce
The
government/cen
Comman tral authority
d
decides.
Custom and
tradition dictate
Tradition
al
Market
Consumers
decide what will
be produced by
casting their
“dollar votes.”
For Whom to
produce
Goals
Country
Examples
Matrix of Economic Systems
p. 014
What to produce? How to produce
The
government/cen
Comman tral authority
d
decides.
Custom and
tradition dictate
Tradition
al
Market
Consumers
decide what will
be produced by
casting their
“dollar votes.”
The
government/cen
tral authority
decides.
Custom and
tradition dictate
Mainly
agricultural and
labor is divided
along gender
lines
Producers
choose the most
profitable
method of
production.
For Whom to
produce
Goals
Country
Examples
Matrix of Economic Systems
p. 014
What to produce? How to produce
The
government/cen
Comman tral authority
d
decides.
Custom and
tradition dictate
Tradition
al
Market
Consumers
decide what will
be produced by
casting their
“dollar votes.”
For Whom to
produce
The
government/cen
tral authority
decides.
The
government/cen
tral authority
decides.
Custom and
tradition dictate
Mainly
agricultural and
labor is divided
along gender
lines
Producers
choose the most
profitable
method of
production.
Custom and
tradition dictate
Goods and
services are
consumed by
those who are
willing and able
Goals
Country
Examples
Matrix of Economic Systems
p. 014
What to produce? How to produce
The
government/cen
Comman tral authority
d
decides.
Custom and
tradition dictate
Tradition
al
Market
Consumers
decide what will
be produced by
casting their
“dollar votes.”
For Whom to
produce
Goals
The
government/cen
tral authority
decides.
The
Economic
government/cen Equity and
tral authority
Security
decides.
Custom and
tradition dictate
Mainly
agricultural and
labor is divided
along gender
lines
Producers
choose the most
profitable
method of
production.
Custom and
tradition dictate
Economic
Stability and
Security
Goods and
services are
consumed by
those who are
willing and able
Economic
Freedom and
Efficiency
Country
Examples
Matrix of Economic Systems
p. 014
What to produce? How to produce
The
government/cen
Comman tral authority
d
decides.
Custom and
tradition dictate
Tradition
al
Market
Consumers
decide what will
be produced by
casting their
“dollar votes.”
For Whom to
produce
Goals
Country
Examples
The
government/cen
tral authority
decides.
The
Economic
government/cen Equity and
tral authority
Security
decides.
China, Vietnam,
Cuba, North
Korea
Custom and
tradition dictate
Mainly
agricultural and
labor is divided
along gender
lines
Producers
choose the most
profitable
method of
production.
Custom and
tradition dictate
Economic
Stability and
Security
Ethiopia,
Somalia,
Afghanistan
Goods and
services are
consumed by
those who are
willing and able
Economic
Freedom and
Efficiency
United States*,
Canada,
Australia, Hong
Kong, Ireland
Notes about the Matrix of Economic
Systems
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 The United States is primarily a market economy; however,
since it has some elements of government involvement (e.g.,
taxation and regulation) it is sometimes called a mixed
economy. Hong Kong is the freest of the market economies in
the world.
 Most of the world’s economies today are mixed economies and
exist on a continuum between market and command. Some
lean toward market; others lean toward command.
Shut up and Color Time!
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Directions: Label the following countries on the map. You may abbreviate. Then, pick a color to represent
command economies, market economies, and traditional economies. Fill in the key below the map and color in the
countries you labeled with the color that represents their economic system.
(Canada, United States, Hong Kong, Ireland, Australia, Ethiopia, Somalia, Afghanistan, China, Vietnam, North
Korea, Cuba)
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Canada
Ireland
US
China
Cuba
Afghanistan
North
Korea
Hong Kong
Vietnam
Ethiopia
Somalia
Australia
Adam Smith and the Free Market
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1. Adam Smith believed that people, acting in their own selfinterest, would work hard and produce what consumers want as
if directed by an invisible hand.
2. Smith argued for trade, saying it opened new markets where
surplus goods could be sold and allowed for cheaper goods to
be imported.
3. Smith believed that competition among businesses would keep
prices in check.
Adam Smith and the Free Market
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4. Smith believed there was a limited but important role for
government to do things such as enforce contracts, grant
patents and copyrights, and provide public works such as
roads.
5. Smith observed that specialization and division of labor in a pin
factory allowed workers to produce many times more pins than
if each worker had been working alone.
IV. Characteristics of Market
Economies
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1. private ownership of resources, which provides incentives for
the owners of resources to weigh the value of present uses
against the value of conserving the resources for future use
2. competition among businesses, which tends to lower prices and
raise quality
3. prices determined in the marketplace through the interaction of
supply and demand
IV. Characteristics of Market
Economies
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4. consumer sovereignty, the concept that consumers’ “dollar
votes” tell businesses what to produce
5. profit motive, an incentive for businesses to produce what
consumers demand and to produce those goods and services
efficiently—keeping costs down—in hopes of earning greater
profit
6. limited government that acts as a referee—protecting
consumers, workers, the environment, and competition in the
marketplace.