Chapter 2 Flashcards
economic system
a particular set of institutional arranges and a coordination mechanism to respond to the economizing problem
Laissez-faire capitalism
“pure capitalism”
the government’s role is limited to protection private property and establishing a legal environment in which contract are enforced and people interact in markets to buy and sell goods, services, and resources
no government has ever employed a pure laissez-fair system because they under take of wide range of economic activities: industrial safety regulations, taxes and subsides, occupational licensing requirements, and Income redistribution
Command sytem
government owns most property resources, and economic decision, making is set by central economic plan created and enforced by the government
socialist or communist governments
China, Cuba, Soviet Union
Market System
“capitalism”
“mixed economy”
a mixture of centralize government economic initiatives and decentralized actions taken by individuals and firms.
private property
The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property
-property rights encourage people to cooperate by belong to ensure that only mutually agreeable economic transactions take place
-facilitates exchange
-encourages investment, innovation, maintenance of property, and economic growth
Freedom of enterprise
the freedom of entrepreneurs and private businesses are free to obtain and use economic resources to produce their voice of goods and services and to sell them in their chosen markets
freedom of choice
the freedom of owners of property resources to employ or dispose of them as they see fit
freedom of choice
the freedom of owners of property resources to employ or dispose of them as they see fit. allows workers to try and enter any line of work for which they are qualified. Consumers are free to buy the goods and services that best satisfy their wants and that their budgets allow
self interest
each firm, property owner, worker, and consumer believe is best for itself and seeks to obtain
competition
two or more buyers and two or more sellers acting independently in a particular product or resource market
freedom of sellers and buyers to enter or leave markets, on the basis of their economic self interest
diffuses economic power throughout the economy
Market economies rely on specialization
using the resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of desired good and services
-Ex: Hawaii specializing in growing pineapples
Human specialization called-division of labor- contributes to society’s out in several ways
the separation of the work required to produce a product into a number of different tasks that are performed by different workers
-Ex: specializing in a certain career path.
-Makes use of differences in ability
-specialization fosters learning by doing
-saves time
Money is a -medium of exchange-
any item sellers generally accept and buyers generally use to pay for good or service (money)
Barter
The direct exchange of one good or service for another good or service
-apples for oranges
-can sometimes not be good because coincidence of wants: we assume that I have excess wheat to trade and wanted oranges and we assume neighbor has excess oranges to trade and wanted wheat, but if coincidence of wants is missing trade is not possible
Characteristics of market system
-private property
-freedom of enterprise and choice
-self interest
-competition
-markets and prices
-specialization
-use of money
-active, but limited government
Advanced technology and capital goods are important because
-the new technology can enhance the productive of workers
-the most direct methods of producing a good or service are often the least efficient
Advanced technology and capital goods are important because
-the new technology can enhance the productive of workers
-the most direct methods of producing a good or service are often the least efficient
Freedom of entry and exit of producers enables an economy to adjust to changes in which of the following area
-technology
-resource availability
-consumer taste
-Consumer sovereignty- is crucial in determining the types and quantities of goods produced
the determination by consumers of the types and quantities of goods and services that will be produced with the scare resources of the economy
dollar votes
the votes that consumers cast for the production of preferred products when they purchase something
market system helps determine the distribution of total output in two ways: ______
basis of consumers ability and willingness to pay
Creative destruction
the hypothesis that the creation of new product and production methods destroys the market power of existing monopolies
Ex: compact disc demolished vinyl record in the 1980s
Capital goods
machinery, tools, factories
made to produce more of other goods
Invisibile hand
the tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.
Invisibile hand
the tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.
Virtues of the market system
-efficiency- promotes the efficient use of resources by guiding them in the production of the goods and services most wanted
-incentives- encourages skill acquisition, hard work, innovative, and entrepreneurship
-freedom- thrives on freedom of enterprise and choice
Command system faces two problems: ___ and ____
coordination problem: government has to coordinate million of individual decisions by consumers, resource suppliers and businesses
Incentive problem: government determines how much of something goes into market: misjudge how many shoes or shorts were wanted: sometimes end in shortage or surplus of supplies.
household (economic entities: circular flow model)
as one or more persons occupying a housing unit
Household buy the goods and services that businesses make available in the product market. Household obtain the income needed to buy those products by selling resources in the resource market
businesses ((economic entities: circular flow model)
forms that purchase resources and provide goods and services to the economy
types:
sole proprietorship
partnership
corporation
sole proprietorship
an unincorporated owned and operated by one person
partnership
an incorporated firm owned and operated by two or more persons
corporation
an independent legal entity that can - on its own behalf- acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activity
How does the circular flow model divide
economy’s decision makers: businesses and household
economy’s markets: resource market and product market
Product Market
a market in which products are sold by firms and bought by households
Resource Market
a market in which households sell and firms buy resources or the services of resources
circular flow model
Businesses buy resources sell products
households buy products sell resources
