Study Guide: Economics Test 1
**Make sure you understand and can define all of the vocabulary terms**
Economic Systems
 What are three basic questions that economists ask about economic systems?
o What will be ___________________ ?
o ___________________ will produce it?
o For ___________________ will it be ___________________?
 Name four types of economies.
o
o
o
o
___________________
___________________
___________________
___________________
Fill in the graphic organizer that describes the key characteristics of each type of economy.
o centrally planned economy
o Economic decisions are based on custom and historical precedent
o government involvement is minimal but varies – individual and businesses have more
influence on use of resources
o government ownership of resources in public sector
o individuals and businesses are owners and decision makers for the private sector
o the federal government is the owner and decision maker for the public sector
o the government’s role is greater than in a free market economy and less than a
command economy
o lack of consumer choice
o profit motive
o individual choice
o competition
o consumer sovereignty
o central ownership, usually by government, or property and resource
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Type of Economy
Traditional
Characteristics
Command
Free Market
Mixed
 Describe four important characteristics of the United States Economy.
o Profit
o consumer ___________________
o competition
o Private ___________________
 Give two or three examples of incentives that companies/businesses offer to consumers
to encourage them to change their buying behavior:
o buy one get one ___________________
o extended warranties
o bundles
 In free market (mixed) economies, most individuals are motivated by profits and their
own self-interest.
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 Explain two relationships between Supply and Demand and what it does to price (eg. ‘If
Supply is high, but Demand is low’ and ‘If Supply is low but Demand is high’):
o increased supply tends to ___________________ price
o Increased ___________________ tends to increase price
 What are four synonyms for the term ‘competition’?
o ___________________
o Contest
o Match
o Battle
 Describe four benefits to consumers of COMPETITION in the marketplace:
o ___________________ prices
o ___________________ quality
o more choice
o drives innovation

Interaction between supply & demand determines __________________.
 Compare who makes most decisions in the public sector vs. the private sector.
o Public sector – ___________________ officials
o Private sector – ___________________ and ___________________

Regulations, laws, setting tax and ___________________ rates, and looking out for public
and consumer safety are all examples of: government involvement
 Why is some government interference and regulations in the economy good?
o protects consumers from unfair or unsafe business practices,
o protects labor force,
o minimizes fraud,
o corruption and unfairness in the market,
o protects resources
 What are some things that are not desirable about too much government
interference/regulations?
o hinders innovation,
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o adds cost to production,
o limits use of ___________________
 What is the significance of private property ownership in free markets? Why is it so
important?
o Individuals and business can own and decide how to use resources
o Higher entrepreneurial spirit
 Describe what you have learned about the role of ‘Profits’ in the marketplace:
o sellers incentive is to make more money
o profit drives what is produced, how it is produced, and how much is produced
o profit motivates behavior
Compare and Contrast the three major types of business organizations. What are the
advantages and disadvantages of sole proprietorship, partnership, and corporation? (Give
examples to support).
o Sole proprietorship-
o Partnership-
o Corporation –
Circular Flow of Money:
 What is money?
o A medium of exchange generally accepted as payment for goods and services
 What are three types of money?
o __________________
o ___________________
o ___________________
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 Why does the United States issue coins and currency?
o In order to facilitate ___________________
 What is a U.S. Federal Reserve Note?
o A bill,
o ___________________
o legal tender
Businesses and Households:
 Where do businesses get their income from?
o Households/consumers purchase goods and services;
o investment ___________________
 Where do households get income (money to spend) from?
o From working for businesses or self-employed or investment income
Banks:
 What is the purpose of financial institutions (such as banks)?
o They receive ___________________, make loans, keep money safe, and facilitate
transfers of ___________________
 How do financial institutions encourage consumers to save and invest money?
o They offer incentives such as interest
Draw your own version of the ‘Circular Flow’ between households, businesses, banks, and the
national government. Make sure you label all relationships.
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




Businesses pay income as wages/paychecks to households.
Households use the income to purchase goods and services from businesses.
Both households and businesses pay taxes to the U.S government.
Banks issue bonds for the U.S. government.
Banks make loans to both businesses and households.
Government spending on public goods and services benefits both households and
businesses.
 Government pays U.S. bond interest to both households and businesses.
 Households deposit savings in banks.
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Globalization:
 Why do nations and states trade?
o To get goods and services they can’t produce efficiently;
o to buy goods and services at a lower cost or opportunity cost
o to sell to other countries; to create jobs and economic growth
 How does technology impact global trade?
o Increases global flow of information, capital, goods, and services
o often lowers cost of production
o increases speed and efficiencies
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