Chapter 2 Flashcards
What is CAPITALISM?
a system based on private ownership of property, competition, and profits as key motivation
What are two other names for capitalism?
market system and free enterprise
What does competition due?
forces people to produce efficiently
What are the three pillars of free enterprise?
- Private Property
- Price System
- Competition
What is PRIVATE PROPERTY?
guarantees individuals right to own, use, and dispose of things of value
90% of all goods are produced by…?
private companies
Who is ADAM SMITH?
- the father of economics
- wrote a book called the wealth of nations that opposed mercantilism
What is LAISSEZ-FAIRE?
government should not involve itself in other peoples affairs
What are PHYSLOCRATS?
people who believed the same things as Adam Smith
What leads firms to produce the best products at the lowest prices?
self-intrest
What is PRICE SYSTEM?
where resources are allocated (distributed) as a result of the interaction of the forces of supply and demand
What is another name for price system?
the invisible hand
What is PRICE?
money value of a good or service
What is the chain reaction that occurs when buyers want more of products…?
- prices are raised
- higher prices attack other producers
- as production increases the need for additional workers causes wages to rise
- competition encourages sellers to produce goods at the lowest price
- lower prices lead to a higher standard of living
What is MARKETSHARE?
% of the total
What is STANDARD OF LIVING?
a measure of the amount of goods an individual considers essential to well being
What is COMPETITION?
rivalry amongst buyers and sellers in the purchase of resources and products
What are the 2 benefits of competition?
- gives us the goods we want and where we want them
- forces producers to be efficient thus conserving resources, increasing output, and raising living standards
What are the negatives of competition?
- too much competition can lead to a monopoly
- monopoly can lead to higher prices and worse products
What is THE ROLE OF ECONOMIC INCENTIVE?
factors that cause people to behave in certain ways as they strive to earn their living
What is ECONOMIC SELF-INTEREST?
the effort to conduct your activities so as to achieve the greatest return (whatever benefits you most)
What are the four EXAMPLES of economic self-interest?
- consumers will travel to a distant store if that will save them money
- employers will increase wages as a means of attracting labor
- savers will switch accounts to receive more interest
- producers will conduct their business so as to earn the greatest profit
What are the four EXCEPTIONS to economic sef-interest?
- workers pass up higher pay bc they don’t want to move
- business reduce their profit by giving to charity
- women give up high paying jobs to have a child
- people that patronize stores that charge higher prices
What is PROFIT MOTIVE?
the force that drives producers to risk their capital in business ventures
What are PROFITS?
retained earnings
What are RETAINED EARNINGS?
money set aside in the form of savings that gives companies the capital they need to expand
What do loses do to companies?
they encourage owners to use their resources more efficiently thus conserving resources and growing economy
What is LAISSEZ-FAIRE and who is a strong believer of it?
- describes a policy whereby government keeps it hands off of businesses
- Adam Smith
What is EMINENT DOMAIN?
the rite of government to take the private property at a fair price
What are the 6 areas the government has involved itself in?
- Safeguarding the market system
- The Government provides some goods and services
- Programs to prevent harmful externalities
- Programs to assist those in need
- Programs to help special groups
- Programs to stabilize the economy
Why and how does the government safeguard the market system?
to prevent monopoly the government has regulated the economy by passing anti-trust laws
List and define the six anti-trust acts passed by the government to safeguard the market system.
Interstate Commence Act - curve the abuses of the railroad
Northern Securities Case
Sherman Antitrust Act - prohibited any combination in the restrain of trade
Clayton Antitrust Act - specified what acts would be considered in restraint of trade
Federal Trade Commission Act - created the office of attorney general
Seller Anti-merge Act - declared merges to be illegal where they lessen competition
What are some goods and services provided by the government?
- National Defense
- Street Lights
- Post Office
What are EXTERNALITIES?
the effects of economic activities that fall outside the market place
What are HARMFUL EXTERNALITIES?
undesirable effects of economic activities that are borne by people who did not participate in the activity
What are the two benefits of the government providing programs to assist those in need?
- to help people by increasing their income
- eliminating the causes of poverty
What programs are created by the government to help people by increasing their income?
- welfare
- food stamps
- social security
What are two ways government programs eliminate the causes of poverty?
- outlaw discrimination
- provide equal educational opportunities
What were programs created by the government to help special groups and how did they help?
- Business/Industry: tariff
- Inventors: patents
- Farmers: subsidies
- Union Workers: labor legislation: wagner act
What program did the government create to help stabilize the economy and how did the program help?
Employment Act of 1945
- minimize unemployment
- stabilize prices
- promote economic growth
What is GNP/GDP?
measures the nations total output of goods and services per year
In 1929 how much of everything produced did the government purchase?
8%
In what year did the government purchase 8% of everything produced?
1929
Today how much of everything produced does the government purchase?
40%
In what year did the government purchase 40% of everything produced?
today
What is a HOUSEHOLD?
one or more people living in the same dwelling and functioning and an economic unit
What are PRODUCTIVE FACTORS?
the resources of land, labor, capital, and enturpernurership
What do the letters C I G stand for?
C - consumer spending
I - business spending or investment
G - government spending
T or F: In 1930, the order of circular flow and GNP from most tolerable is CGI.
FALSE
In 1930 the order is CIG
T or F: In 1930, the order of circular flow and GNP from most tolerable is CIG.
FALSE
Today the order is CGI
What is INVESTMENT?
using money to purchase real capital to be used in the production of goods and services
What is another name for investment?
business spending
What is another name for business spending?
investment
What doe the HGB stand for in the circular flow diagram?
H- household
B- business
G- government
Label the Circular Flow Diagram…
H to G: labor and taxes
G to H: services and wages
G to B: services and payments
B to G: goods and taxes
B to H: goods and wages
H to B: payments and labor
What are the three areas of controversy in the American economic system?
- aid to the poor
- tariffs/taxes
- labor unions
What the two economic goals that have no controversy?
- full employment
- economic growth
What is FULL EMPLOYMENT?
there is a job waiting for everyone who is ready, willing, and able to work
What is ECONOMIC GROWTH?
an increase in output over a period of time - usually a company by an increases in GNP/GDP
What is economic growth measured in?
constant dollars
What are CONSTANT DOLLARS?
inflation has been factored into the number
What are CURRENT DOLLARS?
the number without inflation factored in
What is the HONEST way to measure economic growth?
constant dollars
What is PRICE STABILITY?
- the absence of inflation or deflation
- a period of time when their is little change in what the dollar can buy
- prices stay at equilibrium and do not change
What is INFLATION?
a period where the purchasing power of the dollar is falling and prices of goods are rising
What is DEFLATION?
- a decrease in the level of prices
- a period in which the purchasing power of the dollar is rising and prices of goods are falling
T or F: Inflation is good for consumers and bad for producers.
FALSE
Inflation is bad for consumers and good for producers.
T or F: Deflation is bad for consumers and good for producers.
FALSE
Deflation is good for consumers and bad for producers.
What is ECONOMIC FREEDOM?
you choose how you will earn your living
What is ECONOMIC SECURITY?
those who are unable to produce/care for themselves will be provided for
What are BAILOUTS?
where the government saves a failing company by giving them money so the company does not go bankrupt
When, how much, and to whom are six examples of a government bailing out a company?
1971 - $125 mill - Penncentral Railroad 1971 - $250 mill - Lockheed 1979 - $1 1/2 bill - Chrysler 1984 - $4 1/2 bill - Continental Illinois (bank) Latest - 2 times - General Motors
What is INSOLVENT?
a company is going bankrupt / falling apart
What are the cons of bailouts?
- it is unfair to competition
- it costs tax payers if the companies do not pay the government back
What are the pros of bailouts?
- the companies were restored to health
- jobs were saved
- the loans were paid back
