Chapter 2 Comprehensive Study Guide- Economic Systems Assessment

Economic System

An organized method of allocating scarce resources, such as Traditional, Market, Command, and Mixed.

Traditional Economy

Based on customs and rituals; roles are determined by tradition.

Market Economy

Economic decisions are based on voluntary exchanges between households and firms.

Command Economy

Central planners in the government make economic decisions.

Mixed Economy

Combines market principles with a role for government regulation (e.g., the U.S.).

Examples of Market Systems

United States, Hong Kong, South Korea.

Examples of Command System

Historical examples include the Soviet Union and Cuba.

Efficiency

Making the most of scarce resources.

Freedom

The ability to buy and sell most goods and services freely (e.g., the U.S.).

Equity

Being paid based on skill level, ensuring fairness in distribution.

Security

Assurance of access to essential resources and unemployment benefits.

Growth

Improving the standard of living and production over time.

Innovation

Improving existing technologies.

Specialization

The focus on specific tasks to improve efficiency.

Division of Labor

Assigning different parts of a task or process to improve production.

Factors of Production

Resources like labor, capital, and raw materials necessary for production.

Households

They provide labor and consume goods/services.

Firms

They produce goods/services and hire labor.

Outputs

Goods and services produced by firms.

Inputs

Resources (labor, land, capital) provided by households.

Consumer Spending

Flow of money from households to firms in exchange for goods/services.

Labor and Wages

Flow of labor from households and payments from firms.

Examples of Firms

Microsoft, Disney, Apple, but not households.

Examples of Traditional Economies

Inuits of Canada, Mbuti in Central Africa.

Disadvantage of Traditional Economies

Resistance to new ideas, slow to adapt to change.

Competition in a Market Economy

Encourages variety, quality, and competitive pricing but avoids monopolies.

Importance of Specialization

It allows for higher efficiency and productivity.

Varying Government Involvement in Mixed Economies

Governments regulate to ensure equity and security while allowing market forces to dictate most economic activity.

First Economic Question

What goods and services should be produced?

Second Economic Question

How should these goods and services be produced?

Third Economic Question

Who should these goods and services be produced for?