Economic Systems Chapter 2 Review

Questions and Answers

Identify the three questions that all economic systems must answer.

What goods and services will be produced? How will they be produced? For whom will they be produced?

Describe a pure market economy and identify its problems.

A pure market economy is entirely composed of private firms and has no government involvement. Problems include difficulty enforcing property rights, lack of resources, monopolies, lack of public goods, and externalities.

Describe a pure command economy and identify its problems.

A pure command economy is run completely by the government. Problems include low consumer priority, shortage of freedom of choice, inefficient central planning, wasted resources, and environmental damage.

Compare mixed, transitional, and traditional economies.

Transitional economies are shifting from one economic form to another. Traditional economies are based on custom or religion and often use barter. Mixed economies combine elements of different types, often market and command. Signup and view all the answers

Which question does an economy not have to answer?

How many goods and services will be produced? Signup and view all the answers

In which of these economies might monopolies be possible?

Pure market economy Signup and view all the answers

Pure market economies do not involve?

Government Signup and view all the answers

A pure market economy will most benefit a?

Middle class business woman Signup and view all the answers

Which of the following allows consumers the most choice?

Pure market economy Signup and view all the answers

Which of these countries has a pure market economy?

None of the previous Signup and view all the answers

In a pure market economy, which of these factors answers the three economic questions of the economy?

Culture Signup and view all the answers

? enjoy(s) the most control in a pure centrally planned economy.

The government Signup and view all the answers

Ideally, which of these people would a pure centrally planned economy benefit most?

Government officials Signup and view all the answers

The United States is considered to be a ?

Market economy Signup and view all the answers

Describe the production possibilities frontier and explain its shape.

The production possibilities frontier shows the possible combinations of two types of goods when available resources are employed fully and efficiently. Its shape is typically a curve demonstrating trade-offs. Signup and view all the answers

Explain what causes the production possibilities frontier to shift.

The ratio of consumer goods to capital goods affects how the production possibilities frontier shifts. Signup and view all the answers

Explain the law of comparative advantage.

Comparative advantage is when the worker, firm, region, or country with the lowest opportunity cost of producing an output should specialize in that output. Signup and view all the answers

Understand the gains from specialization and exchange.

Through specialization and exchange, both ends save time. Signup and view all the answers

Study Notes

Economic Questions

Every economic system must address three key questions:
- What goods and services will be produced?
- How will they be produced?
- For whom will they be produced?

Pure Market Economy

Defined by complete reliance on private firms with no government intervention.
Problems include:
- Difficulty enforcing property rights.
- Resource scarcity.
- Potential monopolies.
- Lack of public goods.
- Externalities affecting third parties.

Pure Command Economy

Entirely governed by the state, controlling production and distribution.
Issues associated with this system:
- Low priority given to consumer needs.
- Restricted freedom of choice.
- Inefficiency in central planning.
- Resource wastage and environmental harm.

Economic Types Comparison

Transitional economies: Shift from one economic system to another.
Traditional economies: Based on customs/religion, using bartering, becoming less common.
Mixed economies: Combine elements of different economies (most commonly market and command), aiming for profit while allowing regulation to protect consumers and the environment.

Economy Questions Not Mandatory

An economy does not need to determine:
- How many goods and services will be produced.

Monopolies in Economies

Monopolies can potentially arise in a pure market economy.

Role of Government

Pure market economies are distinct for excluding government involvement.

Beneficiaries of Pure Market Economy

Most advantageous for middle-class businesswomen due to existing market opportunities.

Consumer Choice

The pure market economy offers consumers the maximum choice among goods and services.

Pure Market Economy Examples

No country currently operates a pure market economy.

Economic Question Authority

In a pure market economy, culture primarily influences answers to economic questions.

Control in Centrally Planned Economies

The government possesses the highest control over economic processes in a centrally planned economy.

Benefits of Centrally Planned Economies

Government officials stand to benefit the most under this system.

The United States Economy

Classified as a market economy, reflecting a blend of private and public sector influences.

Production Possibilities Frontier (PPF)

Illustrates possible combinations of two types of goods produced with full utilization of resources.
Current trend reflects a decreasing shape, indicating potential inefficiencies or resource limitations.

Shifts in Production Possibilities Frontier

The frontier can shift based on the ratio of consumer goods to capital goods produced.

Comparative Advantage

Concept states that entities should focus on producing goods with the lowest opportunity costs to maximize efficiency.

Gains from Specialization and Exchange

Specialization and exchange enhance efficiency by saving time and resources for both producers and consumers.

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Description

Test your understanding of economic systems with this flashcard quiz. Explore key concepts such as the fundamental questions every economic system must answer and the characteristics of a pure market economy along with its challenges.