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Economics Study Questions
Chapter 2: Economic Systems and Decision Making
Ch. 2 Sec. 1: Economic Systems
1. What is an economic system? What role does an economic system play in society?
An organized way of providing for the wants and needs of people. It is a set of rules
and distributes goods and services by determining or governs what goods and
services to produce, how to produce them, and for whom they are produced.
2. List the different types of economic systems.
Traditional, Command, Market, and Mixed economic system.
3. Describe a traditional economy. Give examples of a traditional economy. State the
advantages and disadvantages of traditional economy.
In a traditional economy, roles and economic decisions are defined by custom. The
allocation of scarce resources and nearly all other economic activity stems from
ritual, habit, or custom (usually knowledge that is passed down from generation to
generation). Examples include the Central African Mbuti, the Australian
Aborigines, and the Northern Canada’s Inuits. The advantages of a traditional
economy is that everyone knows which role to play and there is little uncertainty
about what, how, for whom to produce. A disadvantage of a traditional economy is
the discouragement of new ideas and new ways of thinking. There is a lack of
progress which leads to a lower standard of living that in other societies. In a
traditional economy people would not be able to make any economic decisions on
their own.
4. Describe a command economy. Give examples of a command economy. State the
advantages and disadvantages of command economy.
In a command economy, a central authority determines what, how, for whom to
produce and the people are expected to go along with the leader’s choices.
Command economies include North Korea, Cuba, the former Soviet Union, and the
People’s Republic of China. There are two advantages to a command economy: the
ability to drastically change direction in a relatively short period of time and many
basic health and public services are available at little or no cost. There are several
disadvantages to a command economy: consumer needs may not be met; hard work
is not rewarded; the necessary decision-making bureaucracy delays decisions; little
flexibility to deal with day-to-day problems; individual intiative goes unrewarded;
and people give up economic freedom and a variety of consumer goods.
5. How are traditional and command economies alike? How are traditional and
command economies different?
Tradtional and Command economies are alike in that they both have production
decisions which are already made and individual initiative is discouraged.
Traditional and command economies are different in that traditional economies
have the individual’s role as defined by customs while in command economies a
central authority defines the individual role.
6. Describe a market economy. Give examples of a market economy. State the
advantages and disadvantages of market economy.
In a market economy, producers and consumers determine what, how, and for
whom to produce. Market economies are based on private ownership (private
individuals and companies control resources). In each market transaction, the
consumer’s dollar acts like a “vote”, ensuring that producers continue to bring to
market the goods and services that consumers want to buy (reflects the laws of
supply and demand). Examples include the United States, Canada, Japan, South
Korea, Singapore, and parts of Western Europe. There are numerous advantages
to a market economy: the ability to adjust to change; the high degree of individual
freedom; the small degree of government involvement; the ability to have a voice in
the economy; the variety of goods and services created; the high degree of consumer
satisfaction; and the ability of individuals and businesses to make decisions.
Disadvantages to a market economy include the inability of the market to meet
every person’s basic needs. Markets also do an inadequate job of providing some
highly valued services such as justice, education, and health care. Citizens of a
market economy must also face a high level of personal uncertainty and the
prospect of economic failure meaning the market economies can fall under certain
conditions.
7. How are command and market economies different?
In command economies there is no foster of initiative or hard work but in a market
economy initiative is what the economy relies on. This means that people would have
to learn new attitudes toward work and new ways of working before a market
economy could be successful. Market economies are efficient because they are
based on competition.
8. What does the term “laissez-faire” mean in a pure market economy? How would
effect people living in the society?
In a pure market economy or capitalist the term laissez-faire is a french phrase,
meaning “to leave alone”. This means the government does not interfere with free
markets. It leaves them alone. The allocation of all goods and services is based on
prices and profits. Unfortunately, a pure market economy without government
control , also gives people the “freedom” to starve because market economies always
result in an unequal distribution of wealth. They cannot guarantee equity, or
fairness.
9. Describe a mixed economy. Give examples of a mixed economy and explain.
A mixed economy is simply a way of naming an economy that incorporates aspects
from different economic systems. In the real world most economies blend two or
more systems together. National economies are based on various combinations of
market forces and government intervention. At the very least, government enforce
property rights, contracts, patents, and copyrights. They provide a stable supply of
money to make voluntary exchange between producers and consumers possible.
Examples include: while china is considered a command economy, it has rapidly
begun to incorporate many aspects of a market structure into its economy. Likewise,
while the united states is considered to have one of the most capitalistic economies in
the world, the government still intervenes in some markets.
10. What conditions must be met for a market economy to be effective?
In order for the market economy to be effective it must be reasonably competitive;
resources must be reasonably free to move from one activity to another; and
adequate information available to everyone.
11. What happens if greed becomes the motivation in a market economy?
If greed becomes a motivation in a market economy it jeopardizes the country’s
health for profit only. Greed can encourage producers to sacrifice product safety, in
order to lower cost. This leads to government interference and explains why most
economies today are based on a mixture of market forces and government control.
Evaluating Economic Performance
12. What are two kinds of goals people may share? Why are they important? How
many major kinds of goals are there? List them.
Economic and social goals are two kinds of goals people share. The goals are
important because they serve as benchmarks that help us determine if the system
meets most-if not all-of our needs. There are seven major kinds of goals. They
include: economic freedom, economic efficiency, economic equity, economic
security, full employment, price stability, and economic growth.
13. Define Economic Freedom. What are three examples of economic freedom for
individuals? What kind of economic freedom do business owners want?
Economic Freedom, or the freedom for people to make their own economic
decisions, is a goal highly valued in the United States. Examples include: they
choose their own occupations, employers, and uses for their time. Business owners
want the freedom to choose where and
how they produce.
14. Describe some of the economic choices people and producers in the United States are
free to make.
People choose their own occupations, employers, and uses for their money;
producers choose where/how they produce.
15. Define Economic Efficiency. What happens if resources are wasted? Why must
economic decision making be efficient?
Economic Efficiency means that resources are used wisely and that the benefits
gained are greater than the cost incurred. If resources are wasted fewer goods and
services are produced and fewer wants and needs can be satisfied. Economic
decision must be effificient so that the benefits gained are greater that costs
incurred.
16. Define Economic Equity. What are two examples of economic equity? What
legislation safeguards economic equity?
Economic Equity is the social goal that explains why so many people support laws
against wage and job discrimination. Examples of economic equity are: equal pay
for equal work; forbidding advertiser to make false claims about their products.
The legislation that bans discrimination for any reason is what type of legislation
that safeguards economic equity.
17. How do laws against false advertising promote the goals of economic equity? What
is a “lemon law”?
Law fight against false advertising in order to promote Economic Equity by
preventing unscrupulous business owners from telling falsehoods; promote
economic equity by ensuring justice in the market. The lemon law requires that
new car buyers to return their cars if they have too many repairs.
18. Define Economic Security. What do American workers want protection from? What
federal program protects economic security for working people? What kind of
protection does Social Security offer?
Economic security is a social goal that results in programs to help support the ill, the
elderly, and workers who have lost their jobs. Most american workers want
protection from adverse economic events. Social security is the kind of federal
program that protects economic security. Social security offers disability and
retirement benefits.
19. Define Full Employment. What happens when people work? What happens when
people do not have jobs?
Most economic systems strive for Full Employment, or providing as many jobs as
possible. When people work, they earn income for themselves while they produce
goods and services for others. People cannot support themselves or their families,
nor can they produce output for others when they do not work.
20. Explain how an increase in the minimum wage might involve a conflict of goals.
What characteristics does the United States economy have that allow it to resolve
conflicts among goals?
Minimum wage might involve conflict because some believed that an increase
futhers the goal of Economic Equity because it is fair. Others might argue that it
conflicts with the goal of full employment by raising unemployment, and with the
goal of economic freedom by preventing employers from paying what they feel are
fair wages. The U.S. economy allows choices, accomodates compromises, and
satisfies most people most of the time.
21. Define Price Stability. Why do you think people consider price stability important?
What is inflation? What happens to people on fixed incomes when there is inflation?
Price Stability, or freedom from inflation (a rise in the general level of prices), is
important to anyone trying to provide basic necessities on a limited income and for
anyone planning their economic future. During inflation, people with fixed incomes
find it very hard to meet their bills and plans for the future.
22. Define Economic Growth. Why is economic growth needed as a population grows?
Economic Growth can be defined as being able to meet everyone’s needs. It is an
important goal because populations tend to increase and existing populations tend
to want more goods and services; in other words, economic growth must continue to
have adequate goods and services for the increased population.
23. Explain trade-offs among goals. What is the opportunity cost of a policy of
protecting a domestic industry, such as shoe manufacturers? What is the trade-off in
increasing the minimum wage?
When goals are at odds, people must compare costs to benefits before resolving the
conflict. Most of the time, people, businesses, and government are able to work out
conflicts among goals. The flexibility of the american economic system allows
choices and compromises. Trade-offs among goals are resolutions in which people
compare their estimates of the cost against their estimates of benefits and then
exercise their right to vote for political candidates that support their position. In the
situation of a shoe manufacturer, the opportunity cost of a policy protecting them
would result in the customer ending up with fewer choices.
Capitalism and Economic Freedom
24. What is a free enterprise economy? Identify the five characteristics of this economy.
A market economy that is normally based on capitalism, a system in which private
citizens, many of whom are entrepreneurs, own the factors of production. A free
market economy operates with minimum government interference. It is another
term to describe the American economy (competition is allowed to flourish with
minimum government interference). The five characteristics of this economy are:
economic freedom, voluntary exchange, private property rights, profit motive, and
competition
25. Define economic freedom as it relates to a free enterprise economy and give an
example. State how people and businesses benefit from economic freedom.
Economic freedom, (people and businesses make their own economic choices). It
allows for people to choose to have their own businesses or work for someone else.
Businesses are free to choose what they will produce and to hire the best workers.
Example: a person could choose to work days, nights, indoors, outdoors, in offices
or in their homes. Businesses benefit from economic freedom because people can
choose their employers, where and when they work, and how they spend their
money. Businesses hire the best workers, decide what and how to produce, and
what prices to charge.
26. Define voluntary exchange. Give example. How does the principle of voluntary
exchange operate in a market economy?
Voluntary exchange buyers and sellers are free to decide whether or not to complete
a transaction, results in both buyers and sellers believing that the good or service
obtained is of more value than the money or product given up. Example: buyers
might take the money and deposit in the bank, hide it under a mattress, or exchange
it for a goods or service. In a Market economy, voluntary exchange allows the
buyers and sellers to freely engage in transactions that leave them both better off.
27. How can both parties gain from voluntary, non-fraudulent exchange?
The result of voluntary exchange, in which buyers and sellers are free to decide
whether or not to complete a transaction, results in both buyers and sellers believing
that the good or service obtained is of more value than the money or roduct given
up. The buyers are able to do more with their money (get the product they believe
in). The sellers have many opportunities to sell their products for cash. Both can
deposit the monies in the bank or exchange it for goods or services.
28. Define private property rights. Give example. What incentive does owing private
property give people?
Private property rights, the privilege that entitles people to own and control their
possessions (motivates people to succeed). Example: tangible items such as a house
or car and untangible items such as skills and talents. Private property gives people
any rewards they earn are kept by working, saving, or investing. It gives the
incentive to be successful.
29. Define profit motive. Give example.
The profit motive is the driving force that encourages entrepreneurship (people and
organizations) to improve their material well-being; and it is largely responsible for
the growth of a free enterprise economy. Example: people start businesses in order
to create a profit (the risktakers); farmers might consider newly accumulated land
as a profit.
30. Define competition. Give example.
Competition (what really thrives capitalism) is the struggle among sellers to attract
customers while lowering cost (sellers help lower prices). Example: private
individuals acting as entrepreneurs owning the factors of production and having the
freedom to produce.
31. Describe the role of an entrepreneur in a free enterprise economy? What aspects of
the economy benefit when an entrepreneur succeeds?
The role of an entrepreneur is one of the most important people in the economy.
The entrepreneur organizes and manages land, capital, and labor in order to seek
the reward called profit. Entrepreneurs want to “be their own boss” and are
willing to risk everything to make their dreams come true. They are the “spark
plugs” of a free enterprise economy. When entrepreneurs are successful, many
benefit. An entrepreneur’s success provides more choices at the store, more part
time job to choose from, and better schools through increased taxes to the state
government. The aspects of the economy that benefit are workers, consumers, and
government. Successful entrepreneurs attract other firms to the industry. The
entrepreneur’s search for profits leads to new products, greater competition, more
production, higher quality, and lower prices for consumers.
32. What is the role of the customer in a free enterprise economy? Explain customer
sovereignty. Why do firms have to sell products customers want in order to earn a
profit?
The consumer has much power in a free market economy. Consumers in the
american economy express their wants in the form of purchases in the marketplace.
Entrepreneurs and customers depend on each other in that entrepreneurs make
goods available to consumers, while consumers guide entrepreneurs regarding what
will and will not successfully sell. Consumer sovereignty describes the role of the
consumer as a ruler (sovereign) of the market. It is the concept that the consumer
decides what goods and services are produced. The dollars they spend are the
“votes” used to select the most popular products more commonly , this is expressed
in a different way by saying that “the customer is always right”. Firms have to sell
products customers want in order to earn a profit because if customers reject the
product and refuse to purchase it, the firm may go out of business.
33. Analyze the consequences of consumer economic decisions in a free enterprise
economy.
The consequences of consumer economic decisions in a free enterprise economy
involve what is, and what is not, produced when consumer express their wants in
the form of purchases in the marketplace.
34. Identify the role of the government in a free enterprise economy?
The role of government in a free enterprise economy is as a protector, a government
may pass and enforce laws meant to prevent the abuse of consumers and workers.
Governments are both providers and consumers. The u.s. government provides
education and welfare and is the second largest consuming group in the economy
after consumers. As a regulator, the government works to preserve competition.
The promoting of national goals is an important role of any government. In the
united states, achieving economic equity and security has resulted in a mixed
economy, or modified private enterprise economy.
35. Explain government regulation.
Using laws to control what businesses can do is called regulation. Government
regulation is intended to increase the public benefit and decrease negative
consequences of the market system. Government regulation takes many forms.
Overall, the goal of the government is to provide for the health and safety of its
citizens and its businesses. Some regulation protects citizens from corporate abuse.
Other government regulations help businesses recover from external problems by
offering money to help offset an unforeseen disaster. Breaking up monopolies, taxes
on alcohol and tobacco (to minimize negative health consequences to society), as well
as laws protecting safety of our food, medicine, workplace, and fining polluters are
examples of government regulation.
36. Explain the role of regulatory agencies.
The existence of numerous government regulatory agencies is yet another way that
the United States is not a purely capitalist society. These agencies work to ensure the
safety of goods and services. For example, government inspectors check various
meats and other foods for harmful bacteria.