Name _____________________________ Date _____________ Economics Per. _______ Chapter 2 Review Section I: Fill-in the Blank free markets mixed economies centrally planned economies communism self-interest free market economy economic system government command socialism mixed economies market economies centrally planned economy traditional economies Answering the Three Economic Questions The three basic economic questions societies ask are: (1) What to produce? (2) How to produce? (3) Who to produce for? An economic system is the way a society decides to answer these three economic questions. There are four general types of economic systems: (1) Market economies (2) traditional economies (3) centrally planned economies (4) mixed economies The Free Market A free market is a self-regulating economic system powered by individuals acting in their own self-interest. In a free market economy, the factors of production are privately owned, and individuals decide how to answer the three economic questions. Centrally Planned Economies In a Centrally planned economy, also known as a command economy, the central government controls the factors of production and answers the three basic economic questions for all of society. Two systems often mentioned when centrally planned economies are discussed are socialism and communism. Modern Economies Most of the economic systems in the world today are mixed economies. These systems use a combination of government involvement and free markets. Throughout the world, there are different levels of government intervention in mixed economies. Section II: Key Terms 1. System that combines the free market with some government intervention. Free market 2. One’s own personal gain. Self-interest 3. The doctrine that states that government generally should not intervene in the marketplace. Laissez faire 4. System in which the central government makes all decisions on the production and consumption of goods and services. Centrally planned economy 5. The struggle among producers for the dollars of consumers. Competition 6. When consumers essentially decide what gets produced in an economy. Consumer sovereignty Section III: Reviewing the Main Ideas 1. Think of a business in your local area. Describe its operation in terms of factor markets and product markets. Grande’s pizza. Factor market – they employ students from households to work (pay for labor). Product market – households pay Grande’s (firm) for pizza (product.) 2. Explain how a factory assembly line is an example of specialization. Everyone has a specific job he/she must do on the assembly line. That is the definition of specialization. It makes the process faster. 3. Why are there no pure free market economies in the world? Markets cannot take care of every part of an economy and necessities in life. Sometimes, government has to step in to offer services like education and national defense. Important Concepts and Terms to Know safety net economic system standard of living free enterprise system self-interest competition traditional economy factor payments socialism product market transition laissez faire Characteristics of: a centrally planned economy traditional economy Why does even a free market economy need some government intervention? See question 3, above. Specialization = efficiency Free market encourages growth Competition is a regulating force in an economy Circular Flow of a Free Market Diagram Can you fill in “1” and “2” on this diagram? “1” Households pay firms for goods and services. “2” Factor market Short Answer Topics You will be required to write a short answer, about the length of a paragraph. You will pick 2 of the following choices. 1. What are some of the advantages of a mixed economy? People get to make their own choices on products they buy, government can help keep economy afloat, it encourages growth/innovation 2. Explain why a completely free market economy would not be a practical one for any major country. The market cannot regulate itself alone. Some needs cannot be met without the help of some government intervention, like building roads, education, national defense 3. What are some of the economic goals most economies try to achieve? Efficiency, freedom, security and predictability, equity, growth/innovation 4. Suppose that you are opening a new video game store in your town. What is a resource you would need from the factor market? Labor – people to sell the games, capital – the building to sell games What would you offer in the product market? Video games How would the government affect your business? Taxes .