CBSE-i

CLASS-VII ECONOMICS
TEACHER’S MANUAL

UNIT-II TYPES OF ECONOMIES

CONTENT

1. Economy – Meaning.

2. Basic Problems of an Economy – What, How and For Whom to

produce.

2. Economic System – Meaning.

Types: (i) Market Economy.
(ii) Centrally Planned Economy.
(iii) Mixed Economy.

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UNIT-II TYPES OF ECONOMIES

MATRIX

CONTENT KNOWLEDGE COMPREHEN- APPLICA- ANALYSIS SYN- EVALUA-

SION TION THESIS TION

Economy Define the concept of an Understand that an Apply this knowledge Analyse the various Evaluate the
‘Economy’. economy is the sum of to understand the activities that are type of activities
all economic various activities that included in an that make up an
Learn about the various
activities. make up an economy. economy. economy.
activities performed in an
economy.

Understand that there are
Types of
basically three types of
economies
economies and they all are
faced with the fundamental
problems of what, how and for
whom to produce.
Comprehend that the Apply their Analyse the
way an economy knowledge about the difference between
addresses its basic types of economies to Capitalist, Socialist
problems decides its classify different and Mixed
economic system. countries of the world Economies.
as Capitalist, Socialist

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and Mixed.

Market Understand that the economies Comprehend that Apply their Analyse how the
Economy which are based on private economic decisions in knowledge to name basic economic
ownership of resources are a Market Economy are some Capitalist problems are
Market or Capitalist Economies. guided by profit countries of the world. solved in a Market
motive. Economy.
Evaluate the
Comprehend that Apply their advantages and
Understand that the economies
Planned economic decisions in knowledge to name Analyse how the disadvantag-es
which are based on government
Economy a Planned Economy some Socialist basic economic of adopting a
ownership of resources are
are guided by welfare countries of the world. problems are Market
Planned or Socialist Economies.
motive. solved in a Planned Economy.
Economy.
Comprehend that
Mixed Apply their
Understand that the economies some economic Evaluate the
Economy knowledge to name
which are based on joint decisions in a Mixed advantages and
some Mixed Analyse how the
ownership of resources are Economy are guided disadvantages of
Economies of the basic economic
Mixed Economies. by profit motive. adopting a
world. problems are
while others are Planned
solved in a Mixed
guided by welfare

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motives Economy. Economy.

Evaluate the
advantages and
disadvantages of
adopting a
Mixed
Economy.

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Scope

Scarcity is a fundamental challenge confronting all individuals and nations. We all face
limitations...so we all have to make choices. How to prioritize and allocate our limited
resources is the basic economic challenge that confronts all nations. People and societies
organise economic life to deal with the basic problems caused by scarcity of resources. An
economic system provides a framework for economic decision making. This lesson will focus
on understanding the Capitalist, Socialist and Mixed economies in order to bring out the
difference between them. Examples of the events taking place in different nations will enable
the students to understand the concepts clearly.

Why we teach this unit?

We observe that different countries adopt different methods of organising economic

activities. Some countries like the United States rely more on private ownership of resources
whereas China and Russia believe in the resources being in the hands of the government.
While in India some resources are privately owned and others are owned by the government.

 This unit aims at helping students understand the features of the three main types of
economies – Market, Planned and Mixed.

 It will enable them to differentiate between the three types of economies.

 It will also help them to understand how the basic economic questions of what, how and
for whom to produce are answered in different economies.

Learning Objectives :- To enable students to

1. Define an economy.

2. Comprehend that an economic system is determined on the basis of how the basic
economic questions are answered.

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3. Appreciate that in some economies, the decisions are guided by profit motive while in
others they are guided by welfare.

4. Understand that economies which have elements of both market and planned economies
are called mixed economies.

5. Analyse the difference between the three types of economies.

6. Classify the major economies of the world into market, planned and mixed economies.

Common errors related to the unit

 The misconception is that the government is only involved in the governance / administration
of the country and all activities related to this. But, in actuality, the government is also
involved in production activities and the percentage of its involvement depends upon the type
of economy.

 It is generally believed that the economic activities undertaken by the government are
focussed on the welfare of the people and they do not earn any profit for the government.
But, the government undertakings do earn a profit along with looking after the welfare aspect.

Cross – disciplinary links

 This unit can be linked to History the study of historical changes in different countries
will help us understand why different countries have different economic systems.

 The study of economic systems can be linked to Geography as the availability of

resources in a country helps to decide the kind of economic system to be followed.

 The profit motive of an economic system can be linked to mathematical calculations.

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Introduction
China and Russia are Socialist Economies. The US is essentially a Capitalist Economy.
India is a Mixed Economy. Global events in the economic sphere highlight these statements.
What is different about the economies of these countries? Why do these countries react so
differently to economic situations?
This aspect of economic life in different countries can be clearly understood with knowledge
about the different types of economies. This unit will provide an insight into these issues.

The lesson is introduced with this warm up activity:

Activity 1:
Oh! How to decide?
Divide students into cooperative learning groups. Each group will give a different topic and
they have to answer this question: “Should this be made available for free, at a discount, or to
be paid in full by the user?” Some suggested topics are schools, police, libraries, college
tuition, medical care, etc…
Give the students about five minutes to discuss this in their groups. Have them share their
thoughts with the class. Explain that there is no right or wrong answer for these topics; they
are still debated today. Tell them that each country must have some sort of economic system
to address these and many more topics. We will learn about the basic economic systems
today – free market, centrally planned, and mixed.

Types of Economies: An Overview

Sara has learnt a lot over the last year. She has now understood that all the activities
performed by people can be grouped under two categories, i.e. economic or non-economic.
She also knows that economic activities can be primary, secondary and tertiary in nature.

So, can we now sum up all the primary, secondary and tertiary economic activities? What are
these economic activities collectively called?

It is called an economy.

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An economy is a framework within which the primary, secondary and tertiary activities take
place. For example, when we talk about the Indian Economy we are referring to the sum total
of the primary, secondary and tertiary economic activities taking place within the territory of
India.

An economy includes activities such as producing, buying, selling, distributing and

other such activities.

A lady buying vegetables.

A shop selling clothes.

A factory producing cars.

How are these different types of economic activities carried out?

These are carried out with the help of resources. We all know that resources are available in
limited quantities and the wants to be satisfied with these limited resources are unlimited.

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Can we satisfy all our wants with our resources?

No, that’s not possible. Remember, our resources are limited.

So, just as scarcity of resources forces people to make choices similarly, a nation makes
choices as every nation has limited resources. It has to make choices between its varying
developmental needs. i.e. the allocation of scarce resources among different uses. Nations
have to decide what to produce and how to distribute the produced goods.

Your coming to school today is a part of allocation of scarce resources; your time is a scarce
resource. The production of a can of Coke or a burger at Mac Donalds and your mother
buying it is also a part of allocation of resources and distribution of goods.

Scarcity of resources leads to the problem of allocation of resources

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Problem of allocation of resources

So, what are the questions that an economy has to answer while allocating scarce resources?
These questions are:

(i) What goods should be produced?

(ii) How should these goods be produced?

(iii) For whom should these goods be produced or how

should the produced goods be distributed?

These three fundamental questions have to be answered by every economy, whether it is a

highly developed economy, the poorest of countries or a small group of people stranded on a
deserted island. These are also called ‘the Central Problems of an Economy’.

Do you think these basic economic questions are answered in the same way in all countries?
Who takes decisions on what, how and for whom to produce? Is it the responsibility of the
government to decide or is the decision taken by the private individuals?

Throughout the world different people have different views on how these economic questions
should be answered. The way a nation answers these questions determines its type of
economy, also called its economic system.

In other words, an economic system is a system to find a solution to the basic economic
problems of what, how and for whom to produce.

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Activity 2
The students are asked to name some products such as milk, cereal, soap, pens, clothing
etc. that they have used today. They are asked how these goods have been produced in
their country.

 Who has taken decisions on their production related questions?

 Why?

Types of Economies

On the basis of how the fundamental questions of what, how and for whom to produce are
answered, there are three main types of economies or economic system that are found. These
are:

(i) The Market Economy

(ii) The Centrally Planned Economy

(iii) The Mixed Economy

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The Market Economy

A Market Economy or Capitalist Economy is a free market system built on private

ownership, in particular, the idea that owners of capital have property rights that entitle
them to earn profit as a reward for putting their capital at risk in some form of economic
activity.

Such an economic system is based on private ownership of resources. Since resources are
privately owned, the decision on allocation of resources is also taken by private individuals.
The producers are free to produce whatever they wish to.

How do you think the producers decide what goods they should produce? Who decides the
price of the product? What guides them while taking economic decisions?

 In a market economy resources are privately owned. Producers are free to decide what to
produce and they are also free to decide the price of their product.

 In a market economy, all economic decisions are guided by the motive to maximise
profits. Producers produce those goods which consumers want and are willing to pay for.

 The government does not interfere in the functioning of the private enterprises.

 In such economies consumers are free to buy goods and services as per their choice and
preference. This type of economic system exists in USA, Japan, Australia and other
countries.

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A Market Economy is guided by profit motive

Advantages of a Market Economy:

 Market economies respond quickly to peoples’ wants.

 There is a wide variety of goods and services in the market.

 New and better methods of production are encouraged, leading to lower cost of goods
and services for the consumer and greater profit for the producer.

Do you know? Adam Smith

Adam Smith, the father of Economics,

designed the modern Capitalist theory. He
claimed that nations would become
wealthy only if citizens were free to
pursue their economic interests.

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Disadvantages of a Market Economy:

 Market Economies encourage consumption of harmful goods.

 Public utilities may not be provided for in a Market Economy, thus the government may
have to interfere to provide these types of goods.

 Social cost may not be considered while producing goods and services. It may lead to
unemployment because machines are used in production.

Use Worksheet 1

Activity 3: The Story of John

John is very happy and satisfied. A year back he had started this small production unit and
today it has given him quite a good profit.

John owned a large piece of land which had been lying vacant for a long time. A couple of
years ago he decided that he wanted to start a production unit on this land and started
exploring different possibilities. Keeping in mind the initial investment needed, the
availability of resources with him, the availability of raw material, labour to be employed,
marketing, etc. he chose to set up a readymade garments factory.

After going to different banks he finally took a loan from the bank that offered the lowest
rate of interest. He decided on the type of rooms that were needed to be constructed to house
a factory. He surveyed the markets and bought all the raw material/inputs from wherever he
could get it cheapest without compromising the quality. Initially he chose to start out on a
small scale till production started smoothly.
Adam Smith
Soon his factory was producing garments of all different materials. He then decided on the
prices at which the various garments would be sold, keeping in mind the cost of production
and the profit he was aiming for. After all, his aim for setting up a production unit was profit.

Slowly, the demand for his products increased and his profits increased.
Today, John is thinking of expanding production in his factory so that he can earn more.
Read the case study given above and answer the following:-

1. Can you name the economic system / type of economy of John’s country?
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2. List the observations from this case study that support your answer.
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I can produce so many things.

I have to decide for myself what

to produce and how to produce it.

The Centrally Planned Economy

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A Planned Economy or Socialist Economy is a type of economic system in which decisions

on the three basic economic questions of what, how and for whom to produce are taken by a
central authority.

 In such economies the government controls all the major sectors of the economy and takes
decisions on allocation of resources. The government decides what and how much to produce
and how much is to be charged.
 Such economies are based on the belief that social welfare can be achieved only if the
government plays an active role in the working of the economy.
 The government allocates resources according to pre-decided goals and objectives to attain
maximum social welfare.

The Government allocates resources in a Planned Economy

The only Centrally Planned economies remaining are North Korea and Cuba.China and
Vietnam are still centrally Planned to a large degree and the governments still of many plan
centrally some parts of economic activity countries.

Advantages of a Planned Economy:

 The welfare of all citizens is the primary goal of this economic system.
 There is greater emphasis on the quantity of life (health, education, elimination of
poverty) than on the quantity of production (output) in the country.

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 The government can influence the distribution of income. Hence, there is less gap
between the rich and the poor.
Karl Marx Do you know?

Karl Marx is the most influential critic

of Capitalism. Marx opposed
Capitalism and felt it should be
replaced by Socialism.

Disadvantages of a Planned Economy:

 There is no real incentive for individuals to be innovative due to absence of competition.
Goods are of poor quality since there is a lack of profit motive.
 Production of goods is decided by the government. Thus, the consumers do not have the
freedom of choosing the goods they want to consume.
 Businesses are usually less efficient due to lack of profit motive.

Activity 4: Choosing a birthday gift.

Sally lives in London, England. Her birthday is around the corner and today she will be going
to the market with her mother to buy a gift for herself. This year she wants to choose it herself.
She has not decided what to buy. Infact, she wants to see what all is available in the market
before she decides.
In the afternoon Sally went to the market with her mother. She excitedly went from shop to shop
looking at all the things available there.
Oh dear! There were so many goods there and so many varieties of each. It would certainly be
very difficult to make a choice.
She could buy a dress with a pair of matching shoes or maybe that pretty pink bag or that doll
house or the jigsaw puzzle or ……………….the choices were endless.
After a long time of debating between this or that she finally made her choice and went home
very happy and satisfied with her gift.
Catliana lives in Cuba. It is her birthday today and her mother has got her to the market to buy
her a gift.
She most probably will buy a dress or maybe a pair of shoes. There are not too many goods / too
many varieties of goods in the market so it would not be difficult to make a choice.
Catliana bought a pink dress with pretty frills and a bow. Though she was happy with her
purchase, she wished she could have had more choice to choose from.
Read the case study given above and answer the following:-
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Sally has so many choices before her but Catliana does not. Can you explain why?

(Hint: Different countries have different economic systems.)

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The Mixed Economy

A mixed economy is an economic system in which both private sector firms and firms owned
by the government take part in economic activity. Since the 1980s the government role in
most Mixed Economies declined as nationalisation gave way to privatisation.

 A Mixed Economy consists of elements of both Market and Planned economies.

 In a mixed economy resources are owned both by the government and private
individuals.

 In such economies some areas of economic activity are the sole responsibility of the
government, while all other areas are open to the private sector. The government
engages itself in those activities which promote social welfare and are considered
unprofitable by the private sector.

 The private sector operates with the aim to maximise profit by allocating resources
efficiently.

A Mixed Economy has joint ownership of resources

Refer to Worksheet 2

Advantages of a Mixed Economy:

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 Since a Mixed Economy involves both government and private enterprises, it has the
advantage of taking the benefits of capitalist nature of private companies and socialist
nature of the government.
 There is less inequality of income because the intent of the government is to have a
balanced economic growth.
 A Mixed Economy allows individuals to run their business and make profits but at the
same time it places some responsibility on these companies by inducing them to
contribute towards the welfare of society.

Disadvantages of a Mixed Economy:

 Since welfare of society is important in a mixed economy it leads to lower than optimum
use of the resources because the government uses the resources for the production of
those goods and services which are beneficial for the society as a whole rather than
producing those goods and services which in economic terms are more beneficial for an
economy.
 Under mixed economy private enterprises have to face lot of difficulty because of various
government loopholes like favoritism and bureaucratic nature which is prevalent in mixed
economy.

Today, most countries of the world have adopted a Mixed Economic System. Eg. India is a
Mixed Economy.

Do you know?
In the US only 25% people believe that Capitalism works well in its present form.
51% people feel that it needs some regulation and reform.

Refer to Worksheet 3

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GLOSSARY
Capital - Wealth in the form of money or assets, taken as a sign of the financial
strength of an individual or a nation.

Capitalist Economy - An economic system in which the means of production and

distribution are privately owned and economic decisions are based on profit
maximisation.

Economy / Economic system – An economy or economic system can be defined as an

organized way in which a state or nation allocates its resources for production of goods and
services.

Mixed Economy – An economic system in which both the state and the private sector direct
the economy, reflecting characteristics of both Market and Planned Economies.

Profit – The positive gain from an investment after subtracting all expenses.

Scarcity - Scarcity occurs when people want more of something than is readily
available.

Socialist Economy – An economic system based on government ownership of resources.

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Name of the School

Assessment Work sheet
Class -VII
Name: Time: 30 mins.
Class: Sec: Max Marks =10

Q1. Fill in the blanks using the words from the box given below: (3)

mixed unlimited planned

for whom scarce profit

An economic system is a way of determining how to use resources to satisfy

human wants. A nation must decide what, how and
to produce. In a economy private ownership of property is combined
with government intervention. A Capitalist Economy works on
motive. Inequalities of income are greatly reduced in a economy.

Q2. Complete the table with information about each economic system. (3)

Economic System Who owns the resources? Who takes economic decisions?

Market Economy

Planned Economy

Mixed Economy

Q3. State whether the following statements are true or false, by writing ‘T’ against the true
statement and ‘F’ against the false statement. Justify your answer. (4)
(a) Consumers enjoy freedom of choice in Capitalist Economies.

(b) An economy includes the activities of buying and selling only.

(c) Economic problems do not arise in Mixed Economies.

(d) Production processes are less efficient in Planned Economies.

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ASSESSMENT RUBRICS
Criteria Excellent(A+,A) Satisfactory(B+,B) Needs Improvement
(C,D)
Knowledge Demonstrates detail & depth Content is relevant Content is sometimes
and in discussion of a chosen to the chosen topic. relevant to the chosen
understanding topic at a level of relative Reflects some topic. Mostly copied
of the content complexity. Content is research work done. from outside source.
relevant to the chosen topic
and displays relevant research

Language Employs complex structure & Conveys thoughts Is ambiguous and vague.
speech. Conveys thoughts meaningfully and
meaningfully and systematically.
systematically. Sometimes uses
complex structure
and speech.
Analytical Interprets accurately & Interprets accurately Does not interpret,
skill appropriately in new contexts. and in new contexts simply explains.
Draw well supported sometimes.
conclusion, integrates ideas or
develop solutions that are
clear & coherent.
Participation Participates fully; fully gives Participates fully. Needs much persuasion
in Group relevant facts; Courteous and Listens to others; from teachers to
Discussion listens to others; Attempts to Gives relevant facts; participate; Gets agitated
get others to participate; Does Gets disturbed when stopped in
not monopolize the /withdraws when between.
proceedings. criticized
Logical Has strong reasoning ability: Reasons out his Finds it difficult to
reasoning is capable of solving complex arguments well can reason out. Needs strong
or abstract problems has make inferences teacher support to apply
ability to make inferences needs clues to apply knowledge to a new
integrates knowledge and knowledge to new context.
applies to new situations. situations.
Team work Is sociable team oriented Is sociable Collaborates occasionally
collaborative, enjoys working sometimes prefers to prefers to work
towards a shared goal. work independently independently
Creative Demonstrates a wide range of Some hesitation in Some hesitation Meaning
expression creativity, versatility and expression meaning not always clear.
imagination, highlights the is clear always.
essence, puts ideas in proper22
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context.
Originality Uses his own ideas, gives his
own view points and relates
it to contemporary time’s
depth in thinking.
With support Cannot relate to new
teachers uses his situation without support
view points and from teachers.
relates it to new
situation.

Resources

 http://mtmorrisecon.weebly.com/uploads/9/9/3/6/9936874/guided_reading_1-1__1-2.pdf
 http://www.marcom.com.au/SGuides/ZZVECS/6VCSM01.pdf
 http://www.colorado.edu/economics/morey/2010/Lectures/2010_Lecture_WhatIsAnEcon
omicSystem.pdf
 http://staffdev.henrico.k12.va.us/problemsolving/documents/Civics%20and%20Econ.pdf
 http://www.educ.uidaho.edu/bustech/Economics/frmk.pdf
 http://scottforesman.com/state/nv/washoe/pdfs/g6_less01.pdf
 Google Images

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