Chapter 2 -Economic Systems

Economics Study Guide

Economic System

A simple way a society organizes how goods and services are produced, distributed, and consumed.

Traditional Economy

An economic system where people produce goods the way their ancestors did, relying on customs, traditions, and simple tools.

Command Economy

An economic system where the government makes all major decisions about what to produce, how to produce it, and who gets the goods and services.

Market Economy

An economic system where decisions about buying, selling, and producing goods are made by individuals and businesses based on supply and demand, not the government.

Socialism

An economic system where the government and the people share control of major industries so wealth and resources are distributed more equally.

Communism

A system where the government owns all property and controls the economy so everyone is meant to share resources equally.

Authoritarian

A system where one leader or a small group has strong control, and people have little freedom to make political decisions.

Private Property Rights

The freedom for people to own, use, and control their own land, belongings, and businesses.

Market

A place—physical or online—where buyers and sellers come together to exchange goods and services.

Laissez faire

A system where the government does very little in the economy, letting businesses and individuals make their own decisions freely.

Capitalism

An economic system where individuals and businesses own property and make economic decisions, and markets run mostly through supply and demand.

Profit

The money a business has left after paying all its costs.

Competition

When businesses try to attract customers by offering better prices, quality, or products than their rivals.

Consumer Sovereignty

The idea that consumers’ choices decide what businesses produce because buyers control demand.

Specialization

When people or businesses focus on doing one specific job or producing one specific good to work more efficiently.

Mixed Economy

An economic system that combines both government involvement and free‑market choices, sharing control between individuals, businesses, and the government.

Nationalize

When the government takes control of a private business or industry and makes it publicly owned.

Global Economy

The worldwide network of countries trading goods, services, and money with each other.

What does “property” mean in simple economic terms?

Anything a person or business owns and has the right to use—like land, buildings, money, or goods.

How do product markets and factor markets work?

• Product market: Where businesses sell goods and services to consumers.

• Factor market: Where businesses buy the resources they need—like labor, land, and capital—to produce those goods and services.

Explain how a country could go from a command economy to a market economy and from a market economy to a command economy.

• Command → Market:
  The government gives people and businesses more freedom to make economic decisions, reduces central control, and allows supply and demand to guide prices and production.

• Market → Command:
  The government takes more control over businesses and resources, limiting private decision‑making and directing what gets produced and how.

What are some examples of a command economy?

Countries where the government makes most economic decisions include North Korea, Cuba, and historically the Soviet Union.

What are some examples of a market economy?

Countries where individuals and businesses make most economic decisions include the United States, Canada, Australia, and the United Kingdom.

How does a voluntary exchange work?

When people trade because both sides want the deal and believe they will benefit from it.

Who are the suppliers in the product market?

Businesses are the suppliers because they produce and sell goods and services to consumers.

Why is it easier to be a part of the global economy today than it was a century ago?

Because modern technology—like faster transportation, the internet, and global communication—makes it much easier for countries to trade, connect, and do business with each other.

Karl Marx would say that all of history is a struggle between whom?

He believed all of history is a struggle between the rich owners (bourgeoisie) and the working class (proletariat).

What is intellectual property?

Ideas or creations—like inventions, music, writing, or designs—that people legally own and can control, just like physical property.