Chapter 2 Economic Systems

Chapter 2
Economic Systems
Chapter 2
Section 1
Types of Economic Systems
Pages 23-28
1. Explain how the three basic economic
questions are answered in traditional,
command, and market economies.
2. Describe the roles of self-interest and
incentives in a market economy.
3. Describe the types of mixed economies the
exist today.
• Chapter 1 you examined the ways individuals
make economic decisions. Now you are going
to focus on the ways nations and governments
make economic decisions.
a. Which factors influence economic decisions
made in your school?
b. Who makes these decisions?
c. What are these decisions based on?
Section 1
• Scarcity forces you to make choices about how
to spend money and time. Scarcity results
from the combination of limited resources and
unlimited wants.
• Nations (leaders) also must make choices in
order to use their natural, human, capital, and
entrepreneurial resources efficiently.
There are four types of economic systems:
traditional, command, market, and mixed.
Traditional Economies
• Traditional economy is based on society’s
values. Modern economic activities are based
on the collection of rituals, habits, laws, and
religious beliefs developed by the groups’
• Traditional economy is passed down from one
generation to another. Custom drives what is
going to be produced.
Command Economies
• Command economy relies on government
officials to answer the three basic economic
• Officials called – central planners/ decide on
what will be produced and made. Individuals
have little or no say in economic choices.
Command economies don’t exist.
• Feudalism, Egyptian history, Zhou dynasty
Market Economies
• Individuals answer how the economy is
driven. The government has no say in what,
how, and for whom goods are produced.
• Market is the free exchange of goods and
• Self-Interest- Adam Smith (1723-1790)
Scottish economist and philosopher.
• 1776-An Inquiry into the Nature and Causes of
the Wealth of Nations
• When the government is not involved in the
economy the market is driven by self-interest.
• Self-interest-the impulse that encourages
people to fulfill their needs and wants. Some
people thought self-interest would lead
people to ignore others. Smith believed that
self-interest allowed for an economy to grow.
• Self-interest acts as an “invisible hand” that
leads people to do what’s best for society.
• Incentives- something that encourages you to
behave in a particular way.
• Examples: reward programs, coupons,
percentage off for a certain amount spent.
Biography Assignment
• Conduct research on Adam Smith.
• Discuss his life and his thoughts on modern
• This question should be included in your
biography. How Smith has influenced the U.S.
free-enterprise system.
Mixed Economies
• Mixed economy-combines all the factors of
traditional, market, and command economic
• Three main categories of mixed economies:
a. Authoritarian and socialism
b. Capitalism
c. Democratic socialism
Authoritarian Socialism
• Communism-government owns or controls
almost all factors of production.
• Cuba is an example of authoritarian socialism.
• Capitalism-individuals own the factors of
production and answer the basic economic
• Example: United States, Canada, Mexico, Japan,
and Taiwan.
• There is limited involvement from the
government. Taxation and spending policies help
support education, defense, and social welfare.
• Some government involvement does occur, but
free choice and ownership are still important.
Democratic Socialism
• This form of economy falls between
authoritarian socialism and capitalism.
• Democratic socialism-government owns some
of the factors of production. Examples of this
would be utilities and communication
• Free elections of government officials
• Sweden, Poland, and France have some
elements of Democratic socialism.
• Research the author Ayn Rand’s philosophy of
objectivism and determine which economic
system it most resembles.
• Compare and contrast the philosophies of Ayn
Rand and Adam Smith.

similar documents