Ch 2 - The Market System and the Circular Flow Flashcards
economic system
A particular set of institutional arrangements ad a coordinating mechanism for producing goods and services
command system
An economic system in which most property resources are owned by the government and economic decisions are made by a central government body
market system
economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities
private property
the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property
The most important consequence of property rights is that they encourage people to cooperate by helping to ensure that only ____ ____ economic transactions take place
mutually agreeable
freedom of enterprise
the freedom of firms to obtain economic resources, to use those resources to produce products of the firm’s choosing, and to sell their products in markets of their choice
freedom of choice
freedom of owners of resources to employ or dispose of their resources as they see fit, and the freedom of consumers to spend their incomes in a manner they think is appropriate
self-interest
the most-advantageous outcome as viewed by each firm, property owner, worker, or consumer
competition
the presence in a market of independent buyers and sellers vying with one another, and the freedom of buyers and sellers to enter and leave the market
market
an institution or mechanism that brings buyers (“demanders”) and sellers (“suppliers”) together
specialization
the use of resources of an individual, region, or nation to produce one or a few goods and services rather than the entire range of goods and services
division of labor
separation of the work required to produce a product into a number of different tasks that are performed by different workers
division of labor’s contribution to society’s output
- make use of differences in ability
- fosters learning by doing
- saves time
medium of exchange
any item sellers generally accept and buyers generally use to pay for goods and services
barter
exchange of one good or service for another good or service
money
any item that is generally acceptable to sellers in exchange for goods and services
characteristics of market system
- private property
- freedom of enterprise and choice
- self-interest
- competition
- markets and prices
- technology and capital goods
- specialization
- use of money
- active, but limited government
consumer sovereignty
determination by consumers of the types and quantities of goods and services that will be produced with the economy’s scarce resources
dollar votes
the “votes” that consumers and entrepreneurs cast for the production of consumer and capital goods when they purchase them in product and resource markets
creative destruction
idea that the creation of new products and production methods may simultaneously destroy the market power of existing firms
“invisible hand”
the tendency of firms and resource suppliers that are seeking to further their own self-interest in competitive markets to also promote the interest of society as a whole
circular flow diagram
the flow of resources from households to firms and of products from firms to households
households
one or more persons occupying a housing unit that provide resources to the economy and use income received to purchase goods and services that satisfy economic wants
businesses
firms that purchase resources and provide goods and services to the economy
