Name _____________________________                                                   Date _____________ 
                 Economics                                                                            Per. _______ 
                 Chapter 2 Review 
                  
                 Section I: Fill-in the Blank 
                  
                 free markets                               mixed economies                   centrally planned economies  
                 communism                                  self-interest                     free market economy                
                 economic system                            government                        command  
                 socialism                                  mixed economies                   market economies 
                 centrally planned economy                  traditional economies 
                  
                 Answering the Three Economic Questions 
                  
                          The three basic economic questions societies ask are: 
                  
                 (1) What to produce? 
                  
                 (2) How to produce? 
                  
                 (3) Who to produce for? 
                  
                 An economic system is the way a society decides to answer these three economic 
                 questions.  There are four general types of economic systems: 
                  
                 (1) Market economies                                        (2) traditional economies 
                  
                 (3) centrally planned economies                             (4) mixed economies 
                  
                  
                 The Free Market 
                  
                          A free market is a self-regulating economic system powered by  
                 individuals acting in their own self-interest.  In a free market economy, the factors of 
                 production are privately owned, and individuals decide how to answer the three economic 
                 questions. 
                  
                  
                  
      Centrally Planned Economies 
         In a Centrally planned economy, also known as a command 
      economy, the central government controls the factors of production and answers the three basic 
      economic questions for all of society.  Two systems often mentioned when centrally planned 
      economies are discussed are socialism and communism. 
       
      Modern Economies 
         Most of the economic systems in the world today are mixed economies.  These 
      systems use a combination of government involvement and free markets.  
      Throughout the world, there are different levels of government intervention in mixed economies. 
       
      Section II: Key Terms 
       
      1. System that combines the free market with some government intervention. 
      Free market 
       
      2. One’s own personal gain. 
      Self-interest 
       
      3. The doctrine that states that government generally should not intervene in the marketplace. 
      Laissez faire 
       
      4. System in which the central government makes all decisions on the production and 
      consumption of goods and services. 
      Centrally planned economy 
       
      5. The struggle among producers for the dollars of consumers. 
      Competition  
       
      6. When consumers essentially decide what gets produced in an economy. 
      Consumer sovereignty 
       
       
       
                 Section III: Reviewing the Main Ideas 
                  
                 1. Think of a business in your local area.  Describe its operation in terms of factor markets and 
                 product markets. 
                 Grande’s pizza.  
                 Factor market – they employ students from households to 
                 work (pay for labor). 
                 Product market – households pay Grande’s (firm) for pizza 
                 (product.) 
                 2. Explain how a factory assembly line is an example of specialization. 
                 Everyone has a specific job he/she must do on the assembly 
                 line.  That is the definition of specialization.  It makes the 
                 process faster. 
                  
                  
                 3. Why are there no pure free market economies in the world? 
                 Markets cannot take care of every part of an economy 
                 and necessities in life.  Sometimes, government has to 
                 step in to offer services like education and national 
                 defense. 
                  
                  
                 Important Concepts and Terms to Know 
                 safety net                              economic system                         standard of living 
                  
                  
                 free enterprise system                  self-interest                           competition 
                  
                  
                 traditional economy                     factor payments 
                  
                  
                 socialism                               product market 
                  
                  
                 transition                              laissez faire 
                  
                  
                 Characteristics of:  
                         a centrally planned economy 
                         traditional economy 
                  
                 Why does even a free market economy need some government intervention? See question 
                 3, above. 
                 Specialization = efficiency 
       
      Free market encourages growth 
       
      Competition is a regulating force in an economy 
       
      Circular Flow of a Free Market Diagram 
       
       
       
       
                           Can you fill in “1” and “2” on this diagram? 
                           “1” Households pay firms 
                           for goods and services. 
                           “2” Factor market 
       
       
       
       
       
       
       
       
       
       
       
      Short Answer Topics 
      You will be required to write a short answer, about the length of a paragraph.  You will pick 2 of 
      the following choices. 
       
      1. What are some of the advantages of a mixed economy? People get to make their 
      own choices on products they buy, government can help keep 
      economy afloat, it encourages growth/innovation 
      2. Explain why a completely free market economy would not be a practical one for any major 
      country. The market cannot regulate itself alone.  Some needs 
      cannot be met without the help of some government 
      intervention, like building roads, education, national defense 
      3. What are some of the economic goals most economies try to achieve? 
      Efficiency, freedom, security and predictability, equity, 
      growth/innovation 
      4. Suppose that you are opening a new video game store in your town. 
         What is a resource you would need from the factor market? Labor – people to 
         sell the games, capital – the building to sell games 
         What would you offer in the product market? Video games 
         How would the government affect your business? Taxes