Chapter 2: Economic Systems

According to Adam Smith, what "invisible hand" regulates the free market economy? (D)

A.) government intervention B.) Specialization C.) economic equity D.) competition and self interest

In a free market economy who owns the factors of production? (B)

A.) individuals B.) households C.) firms D.) the market

free-market economy

an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets.

traditional economy

an economy that relies on habit, custom or ritual to answer economic questions.

self interest

an individual's own personal gain.

firm

an organization that uses resources to produce a product or service; which it then sells.

command economy

another name for a centrally planned economy.

laissez faire

the doctrine that government generally should not intervene in the marketplace.

consumer sovereignty

the fact that consumers have the power to decide what gets produced.

incentive

the hope of reward that encourages a person to behave in a certain way.

factor payment

the income people receive for supplying factors of production.

innovation

the process of bringing new methods, products, or ideas into use.

competition

the struggle among producers for the amount of consumers.

How did heavy industry in the Soviet Union grow so quickly? (B)

A.) government discouraged competition. B.) Soviet planners shifted resources to it. C.) farms did not compete. D.) products were made better.

Why might Soviet planners have stressed heavy industry over consumer goods? (D)

A.) It made a higher profit B.) it was a better investment C.) It created more jobs. D.) it helped other industries.

A difference between the economies of China and North Korea is that? (C)

A.) North Korea does not have a centrally-planned economy. B.) North Korea has begun to introduce free market practices. C.) China is privatizing state-run businesses. D.) China does not allow ownership of private property.

3 key questions?

A.) What to produce. B.) how should it be produced. C.) who should get the goods and services.

The united states economies a mixed economy based on? (D)

A.) a traditional economy, but allowing some government intervention. B.) a centrally planned economy, but limiting government intervention. C.) A free market, allowing no government intervention. D.) A free market, but allowing some government intervention.

Which of the following is part of communism but not socialism? (C)

A.) central planning B.) government controlled services C.) Authoritarian government D.) government controlled resources

Free market economies are able to attain economic growth because (B)

A.) consumers are willing to pay higher prices B.) competition encourages innovation. C.) the government provides incentives. D.) well-regulated markers keep economic conditions stable.

Markets exist primarily because (C)

A.) firms need to make a profit. B.) we need to maintain a competitive society. C.) no one is self- sufficient. D.) people desire economic security.

How is China's economic system today different from the one in Soviet Russia? (B)

A.) it does not own major firms. B.) it allows more economic freedom. C.) it is socialist, not communist. D.) it is not centrally planned.

Each society answers the three basic economic questions based on (A)

A.) its unique combination of values and goals. B.) the number of factor payments. C.) its degree of economic growth. D.) the desire to achieve economic freedom.

The United States government intervenes in the economy in order to? (C)

A.) provide competition for firms. B.) Place barriers on foreign trade. C.) promote the general welfare. D.) protect laissez faire.

To improve its standard of living, a nations economy must (B)

A.) remain stable. B.) grow through innovation. C.) achieve economic equity. D.) allow the central government to make economic decisions.

Traditional economies are usually (D)

A.) small, close communities that welcome change and new technology. B.) large, widespread communities that welcome change and new technology. C.) Large, widespread communities that are able to deal effectively with environmental disaster. D.) Small, close communities that avoid change and new technology.

Government intervention in a modern economy is useful because? (C)

A.) the marketplace always meets the needs and wants of a model society. B.)The marketplace has many incentives to create public works such as parks. C.) Governments are more able to meet some needs and wants of society. D.) Free market principles do not encourage growth.

The ways in which factors of production are combined determines the answer to which economic question? (B)

A.) what will be produced? B.) how will goods be produced? C.) who will consume goods? D.) How can we provide a safety net?

Systems

Free market, centrally-planned economy, mixed economy, and traditional economy.

market

a arrangement that allows buyers and sellers to exchange things.

mixed economy

a market-based economic system with some government involvement.

household

a person or group of people living in a single residence.

safety net

a set of government programs that protect people who face unfavorable economic conditions.

invisible hand

a term coined by Adam Smith to describe the self- regulating nature of the marketplace.

centrally planned economy

economy in which the government answers the key economic questions.

Goals of economic systems

efficiency, freedom, security, innovation, growth, and equity.

communism

government owns all property.

standard of living

level of economic prosperity.

economic system

method used by a society to produce and distribute goods and services.

specialization

the concentration of the productive efforts of business and individuals on a finite number of activities.

economic transition

period of change in which an economic moves from one economic system to another.

private property

property owned by individuals or companies.

authoritarian

requiring strict obedience to a dictator.

socialism

state owns the means of production.

profit

the amount of money a business receives in excess of its expenses.

factor market

the arena of exchange in which firms purchase the facts of production from households.

product market

the arena of exchange on which household purchase goods and services from firms.