UNIT 1: FUNDAMENTALS OF ECONOMICS – ECONOMIC SYSTEMS

I. Vocabulary: In your composition book or on a separate sheet of paper, define/describe the

vocabulary terms listed. Make sure you understand and can explain each term in your own words.

• Traditional Economy: An allocation of scarce resources based on ritual, habit, custom.

• Command Economy: The government runs all of the resources.
• Market Economy: Individuals in the market own the resources.
• Capitalism: A country’s trade and industry are controlled by private owners for profit.
• Laissez-faire: Hands Off

• Invisible hand: A metaphor for the unseen forces that move the economy.
• Incentives: A thing that motivates or encourages one to do something.
• Profit: Financial gain
• Self-interest: Only interested in yourself.
• Mixed Economy: A combination of a traditional economy and a command economy.

II. Economic Systems

- How the government or society will allocate its scarce resources

- How the government or society will answer the three fundamental questions of economics:

- WHAT G&S should we produce?

- HOW should we produce G&S?

- FOR WHOM are we producing G&S?

A. Traditional Economy

1. Allocation of scarce resources is based on ritual, habit, custom.

2. Pros: Everyone knows how to figure out WHAT to produce, HOW to produce, and FOR WHOM to
produce.

3. Cons: Hard to come up with new ideas and G&S, strict rules against breaking tradition, lower
standard of living.

B. Command Economy

1. The GOVERNMENT owns all of the resources

2. Pros: Everyone has a job, equal incomes/pay, free healthcare, government won’t go out of
business

3. Cons: Government in charge could be corrupt, little individual freedom, no incentives to make
better G&S, no incentives to work harder, no competition.
D. Market Economy

1. Individuals in the market own resources

2. Laissez-Faire: Hands Off!

Belief that the economy will function best without government intervention.

Producers/Sellers

1. Produce G&S as cheaply/efficiently as possible

2. Produce G&S consumers want to buy

3. Sell G&S for high, but reasonable prices

Consumers/Buyers

1. Buy G&S as cheaply as possible

2. Buy the best G&S they can afford

3. Be willing to pay a reasonable price for G&S

3. Pros: Lots of individual freedoms, high customer satisfaction, lots of varied G&S.

4. Cons: Lack of public aid and services, have to worry about market failures.

E. Mixed Economy: Combination of both Market and Command Economy