Chapter 2: Economic Systems


Essential Question: How does a society decide who gets what goods and services

Remember the fundamental economic problem?


As a result of scarcity, every society has to decide:

What __________________should be produced?

__________ should goods & services be produced?

Who ________________ these goods and services?

◦ What to produce?

◦ How to produce it?

◦ Who gets it?

Remember our production possibilities examples

What’s the best use of the country’s resources?

◦ Should we use land for farming or parks or mining coal?

Is there enough ______________ to make the good or service?

◦ Is our workforce well educated enough to make it?

What’s the _______________ of the choices the country makes?

◦ Are we in debt to other countries because we have to buy things we can’t make ourselves?

◦ Nuclear power may be cheaper but maybe not safer

◦ Should the government provide an education to children or let parents pay for it if they want to send their children to school?

Who can afford a new car?

Who has to use public transportation?

Who can afford to go to college?

How much should we pay the owners of the factors of production?

◦ Should farmers get paid more than factory owners?

◦ Why do doctors make more money than teachers?

◦ Why are education and health care provided by the government in some countries and things you have to pay for yourself in others?

Societies answer the 3 basic economic questions in different ways

This is based on the difference in value they place on different economic goals:

Efficiency (are we best using resources?)

Freedom (can people choose for themselves?)

Security (is there a safety net?)

Equity (is there a big gap between the rich & poor?)

Growth (is the economy growing? Too fast or too slowly?

Is unemployment too high?

Economic Goals

5 Economic Goals

Which is more important? Who decides?

An economy is efficient if it can deliver the right goods in the right quantity to the right people at the right price.

If the economy is inefficient, you might get shortages or a surplus

Can people buy the products they have the money to pay for?

Can people work where they want to?

Can people own homes?

Can people start businesses if they want to?

How hard or easy is it to do these things?

Index of Economic Freedom

Is there a social safety net?

What happens if you lose your job?

What happens if you can’t pay for a place to live?

What if you are too sick or hurt or old to work?

Is the value of money stable?

Will stores run out of food? Hospitals out of medicine & supplies?

Economic Security Index

Is there a big income gap in the society?

Are all workers valued equally? Or is there racial or gender or age discrimination?

How are goods & services divided up?

Should you get more if you can pay for more?

If you produce more?

What about people who are unable or unwilling to produce in the economy?

US equity issues

As the population grows and changes, the economy needs to add jobs (and consumers)

More growth means more income

This increases the standard of living

(economic prosperity)

Rapid growth is not always a good thing

Think about the problems during

America’s Industrial


Rapid growth can lead to inflation

Is it possible to achieve all of these economic goals?

Are some of them mutually exclusive

(if have one, can’t have the other)

If we have a social safety net, taxes will be higher. Will that slow economic growth?

If we build more factories to achieve economic growth, will that harm the environment?

This is why there are different types of economic systems; societies (and their governments have:

1. answered the three basic economic questions in different ways

2. prioritized the society’s economic goals differently

What are the different types of economic systems? (4)





Decisions are made based on ________ and what has been done in the past

Very little __________________________

Often revolves on the family unit and extended family

Focus on ________________; meeting the basic needs of the society

Tend to be isolated

Few modern conveniences, little access to technology

Relatively low standard of living (by our standards)

What are some examples?

What is a market?

What do all of the following have in common?

Americans value economic _______ very highly, but not all countries place the same value on it, preferring instead to have a stronger social safety net or more economic equity.

There has never been a ________ market economy

We do have some government regulation

Ex. For health and safety reasons

Bring _______ &

_______ together

People can


Don’t have to be self-sufficient

This is the best use of scarce resources

Specialization is

___________________ because it is easier and avoids waste of resources

People can focus on fewer skills

Capital and land, etc. can be used for a single purpose

The 3 basic economic questions are answered through

__________________ in the market (where buyers & sellers come together)

What to produce?

How to produce it?

Who gets it?

How does this process work? Let’s look at a model of a market economy…

_________________ and ___________

Households own the factors of production: land, labor, capital and entrepreneurship (AKA inputs)

_______________ uses the factors of production into goods & services (AKA output)

There are two directions to the flow

◦ One for ______________ (payments)

◦ One for ______________ & _____________ (physical flow)

◦ Government plays a role in the circular flow model also, but more about that in section 4.

Economists assume a few key things about a free market:

1. that a free market is ____________________

The economy is made up of millions of decisions made by _________ and __________

2. Guided by self-________ (not selfishness)

3. Creates competition because people are acting out of self-interest to get the best deal

(pay a lower price or get a better-paying job)

4. Self-interest motivates people to act but

__________________ regulates the market.


Looking out for your own personal gain, not looking to take advantage of others

Idea comes from


◦ Scottish philosopher

◦ Wrote ___________________


◦ Used the metaphor of in

____________________________ to explain how self-interest and competition work together to regulate the market

◦ No one tells people what to make or how much to make or how much to charge for a product.

◦ The market decides these things for itself!

“Give me that which I want, and you shall have this which you want…it is in this manner that we obtain from one another the far greater part of those good (services) which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

◦ -Adam Smith in the Wealth of Nations

1. Economic ____________________

◦ Producers only make what people want to buy.

Prices can adjust quickly


Economic _______________________

People can work where they want and businesses can make and sell what they want


Economic ___________________

Since there’s competition, businesses are always innovating, which creates growth


Additional goals

Consumer sovereignty

_______________, not consumers and producers answers the 3 basic economic questions

Government owns the


They own the land, the factories, decide how much workers get paid, etc.

Socialism is a range of different

___________ and


◦ Socialist countries aren’t all the same

◦ Socialism and Communism ARE


◦ Have prioritized different economic goals than in capitalist countries

◦ Economic equity is more important and many countries think they can better achieve this goal through central planning done by the government

◦ In some socialist countries, there is a lot of economic freedom, but the government plays a larger role in redistributing wealth through taxes and providing government services such as child care and health care.

◦ In other socialist countries, there’s more of a focus on the government owning the means of production

◦ The Scandinavian countries

(Norway, Denmark, Sweden,

Finland) are good examples of socialist countries

◦ China, Laos, Myanmar

(Burma), Cuba are good examples of centrally planned

(communist) countries

Developed in Europe in the 1800s in response to the Industrial Revolution

Based on the writings of __________________, who wrote the Communist Manifesto

Marx viewed capitalism as _________________

Thought all of human history was a battle between the ______________ (bourgeoisie) and the

_______________ (proletariat)

Communism depends competition to drive wages down, so workers will always be exploited

Owners get rich off the work of the proletariat, but don’t share the wealth with them

_____________ underwent a communist revolution in

1917 (the Bolshevik


Was communist until the collapse of the Soviet Union in ________________.

Operated the economy based on


Often had severe __________

Consumer goods were usually of poor quality

Government planning favored the military and heavy industry

__________ had its revolution in 1949 and was is still considered a communist country

The economy was run through central planning by the government until the late 1970s

Has begun some free market reforms

Can this work long term?

Can you have an authoritarian government and capitalism?

if people have economic freedom, will they want political freedom?

1. Economic efficiency

◦ Decisions made by a huge bureaucracy can be inefficient—can get waste and fraud.

◦ Slow to respond to changing economic conditions

◦ Can’t quickly respond to consumer preferences

◦ 2. Economic Freedom

 Command economies prioritize economic equity over freedom, even if this means violence, as in the USSR and China

 No competition since the government owns everything

 Producers and consumers have no choices

No country in the world today has a pure market economy or a pure command economy

All countries are somewhere along the spectrum of mixed economies

Adam Smith and other early economists advocated a ______________________ approach

The role of government has changed

The ______________________ couldn’t efficiently meet the needs of individuals or would conflict with other societal goals

◦ Education

◦ National defense

◦ Infrastructure like roads & bridges & Internet networks

Governments are also needed to protect

_______________________ (what would Locke say about this?)

Governments make sure markets run well by keeping things ______________

◦ Access to accurate information

◦ Preventing monopolies & price fixing

◦ Protecting public health & safety

Government purchases goods and services

Pays government employees

Buys equipment for the armed forces

Builds roads and schools, etc.