Name_____________________________________________ Class_____________
Economic Systems Independent Practice
Directions: Read through this handout and underline/highlight information that you think is important.
Then complete the handout on page 3.
Vocabulary to know:
Consumers- people who buy goods and service (think I buy a sandwich so I can consume it)
Producers- people who sell things (think that I produce the sandwich if I make and sell it)
An economic system is the way a society uses its scarce resources to satisfy people’s unlimited wants.
There are three basic types of economic systems: traditional, market, and command economies.
Traditional Economies
A traditional economy is an economic system in which families, clans, or tribes make economic decisions
based on customs that have been handed down from generation to generation. The main goal of this
type of economy is survival. Men are often hunter gathers, while women tend crops and raise children.
The Kavango people of Nambia are an example of a traditional economy because they base their
economic system on fishing customs where jobs, duties, and distribution of goods is repeated year after
year with little change.
Command Economies
A command economy is an economic system in which the government decides what goods and services
will be produced. Government officials consider what to produce, how to produce, and for whom to
produce based on the resources and needs of the country with little regard to the wants of individual
citizens. North Korea, Cuba, and the former Soviet Union are examples of command economies.
Karl Marx, a 19th century German economist, philosopher, and historian, is recognized to have founded
the ideas behind command economies. Marx believed that all of history can be understood as a class
struggle between those that have (the rich) and the have nots (the poor). Marx predicted that over time,
the poor working class would revolt, overthrow the system, and transfer ownership of resources and
factories into public hands. This later turned into the idea that the government would control resources
and the production of goods and services instead of the working poor. Socialism (an economic system
where the government controls some of the factors of production) and Communism (an economic
system where the government controls all of the factors of production) are types of command
economies. In many of these economies, workers are all paid the same and the government directly
provides all clothing, food, and other products for its populace.
Market Economies
A market economy is an economy based on individual choice. In this system, consumers and producers
drive the economy with little or no government involvement. Consumers are free to spend their money
as they wish. Producers are free to decide what goods or services they will make. In a market economy,
individuals act in their own self-interest in order to buy what they want or make a profit. It is based on
consumer sovereignty, or the idea that consumers rule the economy as producers make products to
meet consumers’ wants because they wish to profit from the sale of the good or service. The United
States is an example of a market economy.
Adam Smith, an 18th century scholar, is recognized as to have founded the ideas behind market
economies. He was a proponent of laissez faire economics, which is French for leave it alone,
demonstrating his idea that the government should leave the economy alone. Instead, he argued
nations would be wealthier if they engaged in free trade. Smith noted in his famous book Wealth of
Nations (1776) that economies are “led by an invisible hand” which means an economy will naturally
adjust to the interests of its consumers.
Example: Command and Market Decisions About Clothing
In command economies, government committees of economic planners, production experts, and
political officials establish production levels for goods and designate which factories will produce them.
The central planning committees also establish the prices for the shirts and blouses, as well as the wages
for the workers who make them. It is this set of central decisions that determines the quantity, variety,
and prices of clothing and other products.
This phenomenon doesn't happen in market economies, because that kind of economic system works in
a very different way. To begin with, no government ministry decides how many shirts or blouses to
manufacture, or what styles and colors. Instead the individual or company decides what shirts and
blouses to produce based on what they believe the consumers want and what will make them the most
money. This leads to direct competition between different firms making and selling these products, and
that competition is one of the basic reasons why there are generally so many different styles, fabrics,
and brands of clothing for consumers to choose from in market economies.
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WORD BANK (use this for the compare/contrast on the next page)
 Adam Smith
 Karl Marx
 Centrally Planned Economy- A System in which the society’s leaders, usually members of the central
government, make all economic decisions.
 Voluntary exchange- trade in which the buyer and seller act according to their own desires and wants
 Property rights- the rights of individuals or groups to own property
 Socialism
 Laissez faire- French for “leave things alone” meaning the government should not interfere in the economy
 Profit- a financial gain from a business transaction (ex. Paying more for a guitar than the seller did, the seller
earns money).
 Capitalism- an economic system based on private ownership of the factors of production
 Communism- An extreme form of socialism in which there is no private ownership of property and little or no
political freedom.
 Competition- the effort of two or more people, acting independently, to get the business of others by offering
the best deal. For example, AT&T, Verizon Wireless, Sprint, and T Mobile compete to offer the best cell phone
features and packages to get your business.
 Consumer Sovereignty- Because consumers are free to purchase the products they want and refuse the
products they don’t want, they have ultimate control over what is produced. Ex. Because American-made cars
were more expensive and got worse gas mileage than foreign-made cars, people began to buy more foreign
cars. As result, American-made car production has slowed and foreign-made car production has increased.
 North Korea- After WWII, Korea was split into two countries. In North Korea, the government controlled every
economic decision. It diverted many of the country’s resources to the military and created a nuclear weapons
program. This military buildup came at the expense of necessities and many North Koreans died from
malnutrition.
 United States- private business and individuals own land, their own labor, and the tools they use to produce
(capital).
 Advantages A- They provide for everyone, including the sick and old who can no longer work.
 Advantages B- Consumers are free to buy or refuse products to determine what will be produced. (No one has
to buy canned spinach and yams if they don’t want to)
 -Individuals are free to develop their talents in work they find satisfying, rather than being assigned to jobs.
 Disadvantages C- In a pure example of this system, the government is never involved in the economy. As result,
there is no system for providing public goods and services such as social security (money given to those too old
to work) or national defense.
 Disadvantages D- Workers have little motive to improve their productivity, as they are all paid the same,
regardless of output
Name_______________________________________________________ Class Period________
Economics Systems Compare and Contrast
Match the economic system to its definition
A. Economy controlled by the government
1. _____Traditional
B. Economy based on survival where decisions are made according
2. _____ Market
to custom
3. _____ Command
C. Economy controlled by the will to consumers and producers
Directions- Look over the word bank on the previous page and decide which economic system
the terms, founders, countries, and advantages and disadvantages belong in. For advantages
and disadvantages, you need only to write the letter A,B,C, or D. Write all other words out that
are written in bold on your paper.
Market Economies
Command Economies
Founded by________________________
Founded by ____________________
Characteristics: (note there should be 7)
 ____________________________
Characteristics: (note there should be only 3)
 ____________________________
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Country Example__________________
Country Example__________________
Advantages ___ (write the letter only)
Advantages ___ (write the letter only)
Disadvantages ___ (write the letter only)
Disadvantages ___ (write the letter only)
Making inferences: Fact: No pure market economies exist today. Why do you think there aren’t any
pure market economies in the world?
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