CH. 2: ECONOMIC SYSTEMS
S1: Answering the 3 Economic Questions
S2: The Free Market
S3: Centrally Planned Economies
S4: Mixed Economies
BELL WORK
Get books/folders ready
 Copy Chart on page 23 somewhere in notes
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Fill this in as we go along in notes
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Will help give you an overview of section
Answer Chapter 2 Warm-up
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Pg. 12 A-D
2.1: ANSWERING 3 ECONOMIC QUESTIONS
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Chapter 2 Essential Question
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Section 1 Guiding Question
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“How does a society decide who gets
what Goods/Services”
“What Goals/Values affect how a society
answers the key economic questions?”
S.1 Objectives:
3 Economics questions
 Societal values that determine how they are answered
 Characteristics of Traditional Economy
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Key Terms
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http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch02/Econ_OnlineLectureNotes_ch2_s1.swf
INTRODUCTION
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Goals/values that affect how a society answers
key ?s
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Each society is guided by its economic system
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Affects the way it does business w/in society and w/other
societies
A societies values, such as freedom or tradition,
guide the type of economic system they will have
3 ECONOMIC QUESTIONS
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B/C of scarce resources a society must answer 3 ?s
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What goods/services should be produced?
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How should these goods/services be produced?
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Who consumes these goods/services?
How ?s are answered defines type of economic
system society has
QUESTION 1 & 2
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What goods/services should be produced?
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Society must decide what to produce in order to
satisfy wants/needs of its people
Because of scarcity (limited resources), each decision
comes at an opportunity cost
How should goods/services be produced?

As a society decides, it considers……
How to best use its 3 factors of production
 Land
 Labor
 Capital : human/physical
 Look at Figure 2.1 on pg. 24 (read/answer TPS)
 What does each choice involve?
 Trade-offs
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QUESTION 3
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Who consumes
goods/services?
Mostly determined by how a
society distributes income
 Through factor payments,
including profits, society
can determine who will be
consumers of goods/services
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How much will owners make,
teachers, bankers, etc.
 Answer can tell a great deal
about societies values
ECONOMIC GOALS
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Efficiency

Freedom

Security

Equity

Growth
ECONOMIC EFFICIENCY
Societies answer 3 ?s
based on importance
they attach to their
economic goals
 Scarce resources make
societies try to
maximize what they
can produce using
their resources
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If they can accurately
assess what to produce
they can increase their
efficiency
ECONOMIC FREEDOM AND SECURITY
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Some societies limit the economic freedoms of its
people
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U.S., we face some limitations, but in general, we
have a lot of freedom
Economic systems also strive to achieve a degree
of economic security
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Basically, systems are there to reassure people that
goods/services will be available and they will get paid
for work as well
ECONOMIC EQUITY AND GROWTH
Another goal that is defined differently in
different societies. Basically how they will divide
their “pie”
 Checkpoint: “What are 2 examples of economic
goals?”
 Growth: Economies need to grow

Need to provide jobs for new people in workforce
 Strive to improve standards of living
 Innovation plays a large role in economic growth and
success
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ECONOMIC GOALS IN CONFLICT
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There are some additional economic goals for
certain societies
Environmental protections
 Full employment
 Protecting national industries
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Societies end up having to prioritize their
economic goals (arrange them in order of
importance)
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Each choice comes with some kind of trade-off
TRADITIONAL ECONOMIES
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Oldest and simplest economic system
Rely on habit, custom, or ritual
 Revolve around family
 Little room for innovation/change
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Found in communities that…
Stay small and close
 Work to support entire community over selves
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Success is judged by how they meet their own
needs
Often lack modern conveniences
 Lower standards of living
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LESSON CLOSING
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Complete pg. 13
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Exploration; Both A and B
HW and some of BW tomorrow
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Page 55
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Evaluating U.S. Economy
Read Section 2
CHAPTER 2 BELL-WORK
Get Books/Folders
Finish up pg. 55
Copy chart for S2 to top of notes or sheet
Fill in Chart from section 1 that you copied
Go over answers
CHAPTER 2 : SECTION 2
 “What
are the characteristics of a
free-market economy?”
write on top of notes
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Objectives
Explain why markets exist
 Analyze a circular flow model of a free-market economy
 Describe self-regulating nature of marketplace
 Identify advantages of free-market economy
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Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-3698335/Flash/Ch02/Econ_OnlineLectureNotes_ch2_s2.swf
INTRODUCTION
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What are the characteristics of Free-market
economy?
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Characterized by…..
Households and firms
 Factor and product markets
 Self-interest
 Competition
 Economic freedom, efficiency, and equity
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WHY DO MARKETS EXIST?
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Markets exist to eliminate the need for any one
person to be self-sufficient
Examples: NYSE, Farmers markets, Scheel’s, Wal-Mart
 They allow us to exchange the things we have for things we
want
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Money for goods/services in most cases
Lead to specialization
Rather than self-sufficiency, we specialize in a few
products/services
 Leads to efficient use of 3 factors of production
 Allows businesses to focus on limited number of related
products/services
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Markets are needs as an arena to buy/sell products
FREE MARKET ECONOMY
3 ?s answered by voluntary exchanges in
Marketplace
 Individuals choose
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What gets made
 How it is made
 How much people can consume of good/service
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Individuals/Private businesses own factors of
production
 Look at figure 2.2 pg. 31
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Need to understand what each sector provides one
another
Answer two questions…. TPS
FACTOR AND PRODUCT MARKETS
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Factor Market
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Firms purchase factors of production
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Product Market
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Renting/buying land, hiring/paying workers, borrowing $$
Arena where households buy good/services a firm
produces
Checkpoint:
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What is the role of firms in the free-market economy?
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Firms buy factors of production from households, then uses
them to produce goods/services
SELF REGULATION

Wealth of Nations
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Adam Smith observed countless transactions in
marketplace that showed….
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Smith’s take
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Buyers/Sellers only consider their self-interests
Positive incentives of lower prices causes more buying
 B/C opportunity cost of the purchase is lowered
Regulations
Self-interest is the motivating force in the free-market
 Consumers pursue their self-interest by looking for
lower/lowest prices
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SELF-REGULATION
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Competition
Firms seek to make higher profits by increasing sales
 Competition among firms makes increasing sales not
always possible
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Self-interest and competition work together to
regulate the marketplace
 Smith called this the “Invisible Hand”
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ADVANTAGES OF FREE MARKET
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“Perfect Conditions” lead to meeting these goals
Read aloud…. Pg.34
 Efficiency
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Freedom
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Large degree of economic freedom
Growth
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Rapid response to changing conditions
Encouragement of economic growth
Lend themselves to consumer sovereignty
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Consumers have power to decide what gets produc
ANSWER THE QUESTION TO CAPTION ON
PG. 32
LESSON CLOSING
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Workbook
Pg. 14
 Pg. 63
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HW
Read Section 3
 Finish up pg. 63 Activity
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