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Chapter Summary
Economic Systems and Decision Making
ESSENTIAL QUESTION How does an economic system help a society deal with the fundamental
problem of scarcity?
At various times in human history, different societies have established different economic systems.
The way a society organizes its economy has profound effects on the lives of individuals, on the way
businesses are organized and run, and on the degree to which the government has a role in running,
or even controlling, the economy and economic activity.
Economic Systems
• In a mixed market economy, there is a free
market economy, but the government may
control certain sectors of the economy.
• Some societies are based on tradition.
• In a traditional economy, everyone knows
what role to play. But traditional economies
tend to discourage new ways of doing things.
• Advantages of a mixed economy are that they
grow faster than command economies and they
can provide goods and services to those who
cannot afford them.
• In command economies, a central authority
controls the economic system.
• Disadvantages include the high cost of
providing needed services to the population.
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• One advantage of a command economy is
that the government can quickly change
the direction of the economy.
Global Transition to Capitalism
• While a free market economy provides many
advantages, transitioning economies
experience problems and disruptions.
• Disadvantages of a command economy
include a tendency for the elite to
concentrate wealth, goods, and services
among its own members, and the need for a
large, slow decision-making bureaucracy.
• Many Russians suffered great deprivation
when the Soviet Union transitoned from a
socialist, government-run economy to a free
market economy in the early 1990s.
• A market economy is based on supply and
demand, providing greater freedoms to decide
what, how, and for whom to produce goods.
• China’s ongoing transition has brought
tremendous economic growth to the country.
• Benefits of a market economy include less
government intervention and a variety of goods.
• Some nations in Latin America, such as Chile
and Argentina, are undergoing rapid
transitions from isolationism and
nationalization to capitalism.
Mixed Economies
• A mixed economy has characteristics of
traditional, market, and socialist economies.
• Most nations of Eastern Europe are transitioning
from Soviet socialism to a free market economy.
Poland, the Czech Republic, and other nations
are adopting the free market system. Many
have joined, or have applied to join, the
capitalist nations of the European Union.
• Mixed economies exist because people adapt
successful practices from other economies.
• Communism is a theoretical ideal; markets
that describe themselves as communist are
made up of socialism and other market types.
• A free market capitalist system can be
organized and run in different ways, as is
evident in nations such as Japan, South
Korea, Singapore, Taiwan, and Sweden.
• In mixed socialism, as in modern China, the
government controls some, but not all, of the
resources in the economy. Some private
enterprise is allowed.
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