Economic Systems and Opportunity Cost
Economic Systems and Opportunity Cost
4 Economic Systems of Gov’t:
• Market Economy
• Command Economy
• Mixed Economy
• Traditional Economy
• A country’s economic system answers the
3 basic questions:
• A. what to produce
• B. how to produce it
• C. for whom it is produced
Market Economy-also known as capitalism-these
decisions are made in free markets by the
interaction of supply and demand.
• Private citizens own the factors of production-not the gov’t
• Businesses are driven by profit-motive and decide what to
• Consumers make their own decisions about what to produce
• Supply and demand interact to set price; producers and
consumers base their decisions on price
• A market economy is decentralized-decisions are made by all
the people, not just a few.
Role of gov’t in US Economy
• Provides public goods and services
• Regulates businesses to make sure
markets stay competitive
• Works to reduce negative externalities and
increase positive externalities
Command Economy-central gov’t makes the major
• Individuals have few choices and little influence over the economy
• Also called controlled economy, socialism, or communism
• Gov’t owns most productive resources, especially land and capital
• Gov’t makes the 3 basic decisions
• Gov’t fixes the wages of workers and sets prices
• Command economies can be very ineffieient resulting in slower
growth and lower GDP (Gross Domestic Product).
– Two leading command economies are Cuba and North Korea.
Mixed Economy-combines basic elements of a pure market
economy and a command economy.
• Combines private ownership or property and individual decisionmaking with gov’t intervention and regulations.
• The US is a mixed economy-where individuals make decisions
based on market phenomena.
• Our gov’t makes laws to protect private property and regulate areas
Today, many nations have changed from command economies to more
of a market economy.
• For example, countries in the former Soviet Union and even China
are making strides toward a more market economy.
• Command economies were not able to achieve the economic growth
that market economies had.
• The Soviet Union broke into separate countries in 1991 b/c
Communist leaders cound not keep the economy going.
• It has been a difficult transition for the Russian economy.
• State owned factories have been switched to private ownership,
stock markets have been created, etc.
• In the 1980’s, China began to introduce market reforms and began
to convert factories to private ownership. It also set up a stock
• This has resulted in a growing economy over the past 30 years.
Traditional Economy-economic decisions of what, how, and
for whom to produce are based on custom or habit.
• The country’s economy and way of life are passed down from
generation to generation.
• Decisions are usually made by a small group, tribe, or religious sect.
• They are usually poor, developing countries with a high rate of
population growth and a declining GDP.
• People have a smaller share of what the economy produces.
• Traditional economies are usually landlocked and do not have
access to ocean trade; others lack many natural resources
• Many developing traditional economies have suffered through civil
wars that have destroyed roads, bridges, factories and other
• Some traditional economies borrow large sums of money to spur
economic growth which means they owe more money than the GDP
they produce in a year.
Assignment: Due 11/09/09
• Fold the legal size paper so that you have
• Label each quadrant with one of the four
economic systems of gov’t
• Illustrate each of the economic systems
– Illustrations must include color
Systems of Government
• Quiz answers
Anarchy__1. absence of government
Communism__2. authoritarian party that controls the economy; government of China and the former USSR
Theocracy___. government where the ruler is considered divine
Dictatorship__4. government that takes over by force or fear
Democracy__5. government based on the rule of the people
Monarchy__6. government ruled by an individual who is usually a king or queen
Autocracy__7. rule by one person
Oligarchy__8. rule by a group of persons
Authoritarian__9. type of government where power is held by an individual or group who is not accountable
Totalitarian__10. type of government where the ruler changes all areas of the government or country
11. Identify a dictator and his country. Castro/Cuba; Hitler/Germany; Hussein/Iraq
12. Name the type of government in which the federal and state governments share power. federalism
ECF Records Company
• ECF records produced 5,000 CDs last
month. It sold each of these CDs for $10.
The rent for the studio was $3,000/month.
Power to operate the machines cost $500.
The costs for the musicians were $12,000.
The commercial printer cost $400 per
month to rent. The materials used to
produced the CDs, cases, and packaging
1. Identify the capital good(s) mentioned
• Any machines
• Commercial printer
• Materials used to produce the CD’s,
cases, and packaging
2. Identify other resources used for
3. Were there any natural resources (land)
used? If so, what?
• Approximately half an acre of land
4. Identify the fixed costs; calculate the total
• $3,000 Rent
• $400 Printer Rent
• $3,400 = total fixed cost
5. Identify the variable costs; calculate the
• $500 Power
• $12,000 Labor
• $4000 Packaging and Materials
• $16,500 total variable cost
6. What is the total cost? Calculate the total
• Total Cost- addition of variable and fixed
• $19,900 = Total Cost
7. Define average total cost; calculate the
• Average total cost- when a business
divides the total cost by the quantity
produced to calculate cost per good.
• $19,900 divided by 5,000 CDs = $3.98 per
8. Define revenue; calculate the revenue
• Revenue- incoming funds
• 5,000 CDs multiplied by the $10 cost of
each CD = $50,000
9. Define profit; calculate the profit.
• Profit- the amount of revenue left after
total costs have been deducted
• $19,900 subtracted from $50,000 =
10. Define opportunity cost.
• Opportunity cost- what is given up when
another choice is made
11. What would be the opportunity cost of
purchasing four CDs for someone who loves
cheeseburgers if a cheeseburger costs $5?
• 8 cheeseburgers
12. If it costs $19,901 to produce 5,001 CDs, what
is the marginal cost of producing another CD?
5,000 = $19,900
As compared to
5,001 = $19,901
Then the one extra CD costs $1.00 as
compared to the $3.98 per CD for the first
5,000 CDs produced
13. If the selling price remains constant, what is
the marginal benefit of selling another CD?
• $3.98 - $1.00 = $2.98 is the marginal
benefit of selling another CD
14. Assuming the factory can sell additional CDs,
would it be profitable to produce more? Why or
• Yes, it would be profitable to make more
CDs because the additional CDs are much
less expensive to produce and will result in
additional profit per CD.