Chapter 2: Economic Systems
2-1 Summary: Fill in the missing words.
Because economic resources are limited, a country must answer three key economic questions. These are:
1)_______________________________? 2)____________________________________?
3)_______________________________? In answering these questions, societies must consider their economic
goals. Some goals, such as economic freedom or economic equity, are considered more important in some
countries than in others. Other goals, like economic efficiency, are shared by most countries. Another
important goal is growth and innovation. A nation’s economy must grow in order to improve its
_____________________________, or level of prosperity.
Four types of _____________________________ have developed as societies attempt to answer the three
economic questions according to their goals. An economic system is the method a society uses to produce and
distribute goods and services. A ___________________________ relies on custom to make most economic
decisions. People grow up doing what their parents did, and there is little innovation and change. In a
_______________________________, economic decisions are made by individuals and are based on exchange,
or trade. Market economies are also known as the _____________________________. In a
____________________________, the government makes most economic decisions. Most economies today are
__________________________, a combination of the three other economic systems.
While most societies pursue all of these goals, a society may value some goals more than others. FILL
IN THE ECONOMIC GOALS OF NATIONS.
ECONOMIC
EFFICIENCY
ECONOMIC
FREEDOM
ECONOMIC
SECURITY AND
PREDICITABILITY
ECONOMIC
EQUITY
ECONOMIC
GROWTH AND
INNOVATION
Chapter 2: Economic Systems
Supply in the missing information about economic systems in the spaces provided.
1. Three economic questions answered:
(a)____________________________________________________________________________
(b)____________________________________________________________________________
(c)____________________________________________________________________________
2. Economic concept necessitating choices and priorities in any society:
3. Economic question answered by basic social values and goals:
4. Five basic economic goals guiding society’s choice of systems:
(a)____________________________________________________________________________
(b)____________________________________________________________________________
(c)____________________________________________________________________________
(d)____________________________________________________________________________
(e)____________________________________________________________________________
5. Four main kinds of economies:
(a)____________________________________________________________________________
(b)____________________________________________________________________________
(c)____________________________________________________________________________
(d)____________________________________________________________________________
Chapter 2: Economic Systems
2-2 Summary: Fill in the missing words.
None of us can produce everything we need and want. ____________________ exist so that people can
exchange the things they have for the things they want. A market is an arrangement that allows buyers
and sellers to exchange _____________and_______________. Markets function because of
________________________ and ____________________. _______________________ means buyers
and sellers are focused on personal gain. It motivates consumers to buy the goods and services they
want at the lowest prices possible. _______________________ is the struggle among producers for the
dollars of consumers. It keeps prices low as firms attempt to make their prices attractive to consumers.
Together, self-interest and competition work to regulate the marketplace.
The factor market and the product market are the two main parts of the free market. In the
___________________, firms purchase land, labor, and capital-the factors of production-from
households. Firms rent land, hire workers, and borrow money from investors. In the
___________________, households purchase goods and services produced by firms. The free market
helps an economy meet many economic goals. It encourages efficiency, economic freedom, and
innovation and growth. However, two other economic goals-_______________and _____________-are
difficult to achieve in a pure market system. Many societies have modified the free market to better
meet their goals.
Chapter 2: Economic Systems
The circular flow diagram shows interactions between businesses and households in the free market.
FROM YOUR BOOK, PROPERLY LABEL THE CIRCULAR FLOW DIAGRAM.
1.
5.
6.
3.
4.
7.
8.
2.
1. ________________________________________________________________________
2. ________________________________________________________________________
3. ________________________________________________________________________
4. ________________________________________________________________________
5. ________________________________________________________________________
6. ________________________________________________________________________
7. ________________________________________________________________________
8. ________________________________________________________________________
Chapter 2: Economic Systems
List and describe the role or roles played in a free market economy by each factor in the diagram
below.
Roles and Functions in a Free Market Economy
Free
Market
Economy
Chapter 2: Economic Systems
2-3 Summary: Fill in the missing words.
In a centrally planned economy, _________________________, rather than the individual producers
and consumers in markets, answer the key economic questions about production and consumption.
The government owns the ____________________ and ________________. It controls where people
will work and how much they will be paid. It decides what is produced and at what prices things will be
sold. The term _____________________ and ______________________ are associated with centrally
controlled economies. _____________________ attach great value to the goal of economic equity.
They believe that economic equality is possible only if the public controls the economy. Socialist
countries may be __________________________. _______________________ share many of the goals
of socialists, but believe that these goals can only be achieved through violent revolution. In a
communist society, individuals lack personal freedom.
The former ____________________ was an example of a communist nation where most economic and
political power was controlled by the central government. Under the Soviet system, all workers were
guaranteed employment and income. Factories and farms had to meet production goals set by the
government. Centrally planned economies try to promote faster economic growth and more equal
distribution of goods and services. However, these systems almost always fall short of their goals.
Without the incentive of __________________, producers have no reason to produce more or better
products. Consumers find it difficult to meet their needs or wants, having to accept poorly-made
merchandise. In addition, individual freedoms are limited.
Chapter 2: Economic Systems
In centrally planned economies the government makes all important economic decisions. THINK AS A
CENTRALLY PLANNED ECONOMY AND FILL IN THE MISSING SPOTS.
Limited amount of cotton
Government decides producers should make more uniforms
than sweaters
Less cotton goes to
______________________ factories
Less _______________ for
consumers
More cotton goes to
______________________ factories
More _______________ for soldiers
Chapter 2: Economic Systems
Supply the missing information in the chart below.
Central Economic Planning in the Former Soviet Union
1. Main Goal: _____________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2. Role of central government:
(a) _____________________________________________________________________
(b) _____________________________________________________________________
_____________________________________________________________________
3. Effects on agriculture:
(a) Positive: ____________________________________________________________________
(b) Negative: ___________________________________________________________________
4. Effects on industry:
(a) Positive: ____________________________________________________________________
(b) Negative: ___________________________________________________________________
5. Effects on consumers:
(a) Positive: ____________________________________________________________________
(b) Negative: ___________________________________________________________________
Chapter 2: Economic Systems
2-3 Summary: Fill in the missing words
No economic system has all the answers. The traditional economy offers little hope for growth or
change. The centrally planned economy is slow-moving and offers consumers few choices or freedom.
Market economies have many advantages but also have their limitations. For example, markets do not
provide answers for some of society’s needs, such as the need for defense, education, and fast
transportation routes. Governments provide answers to these needs by maintaining armed forces,
schools, and roads and bridges. Governments also enforce property rights and rules against unfair
competition.
No country has an economy that is purely free market or purely controlled by the government. All are
mixed economies, combining free markets with intervention, or involvement. There is a
____________________-a range with not clear divisions-of economic systems. At one extreme, the
North Korean economy is almost completely controlled by the government. China has a centrally
planned economy but is in __________________, a period of change, moving toward a market system.
Hong Kong is governed by China, but has a separate economic system based on its years as a colony of
Great Britain. This system is dominated by free markets. Compared to most other nations, the United
States has an economy with little government involvement and a great deal of economic freedom. Such
a system is called _____________________.
The world’s nations vary greatly in economic systems. ANSWER EACH OF THE FOLLOWING
QUESTIONS ABOUT THE DIFFERENT ECONOMIC SYSTEMS.
1. How does free enterprise differ from laissez faire? _______________________________
________________________________________________________________________
2. Why is China said to have a transition economy? ________________________________
________________________________________________________________________
3. What does it mean to privatize an industry? ____________________________________
________________________________________________________________________
4. Why do the world’s national economies fall inside a continuum? ___________________
________________________________________________________________________
Chapter 2: Economic Systems
Fill in two supporting facts or details under each main idea by answering each question.
Main Idea: Government intervenes in market economies because some needs and wants of modern
societies are hard to answer in the marketplace or may be answered more fairly for all members of
society with government involvement.
1. What needs and wants are hard to answer? __________________________________________
______________________________________________________________________________
2. What needs and wants are answered more fairly with government involvement?
______________________________________________________________________________
______________________________________________________________________________
Main Idea: Government intervention dominates in some mixed economies.
3. How does government intervene in North Korea’s economy? ____________________________
______________________________________________________________________________
4. How is government intervention less extreme in China’s economy? _______________________
______________________________________________________________________________
Main Idea: The market system dominates in some mixed economies.
5. What country is one of the world’s freest markets? ____________________________________
______________________________________________________________________________
6. Why is it one of the freest? ________________________________________________________
______________________________________________________________________________