Chapter 2- The Market System and the Circular Flow

Question 0

Command System

Answer 0

A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; command economy; communism.

Question 1

Economic System

Answer 1

A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.

Question 2

Market System

Answer 2

All the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate the economy’s scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers.

Question 3

Private Property

Answer 3

The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.

Question 4

Freedom of Enterprise

Answer 4

The freedom of firms to obtain economic resources, to use those resources to produce products of the firm’s own choosing, and to sell their products in markets of their choice.

Question 5

Freedom of Choice

Answer 5

The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.

Question 6

Self-interest

Answer 6

That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.

Question 7

Competition

Answer 7

The presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market.

Question 8

Market

Answer 8

Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.

Question 9

Specialization

Answer 9

The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services.

Question 10

Division of Labor

Answer 10

The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.

Question 11

Medium of Exchange

Answer 11

Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.

Question 12

Barter

Answer 12

The exchange of one good or service for another good or service

Question 13

Money

Answer 13

Any item that is generally acceptable to sellers in exchange for goods and services.

Question 14

Consumer Sovereignty

Answer 14

Determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers’ direction of production through their dollar votes.

Question 15

Dollar Votes

Answer 15

The “votes” that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets.

Question 16

Creative Destruction

Answer 16

The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies.

Question 17

“Invisible Hand”

Answer 17

The tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interests of society.

Question 18

Circular Flow Diagram

Answer 18

An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

Question 19

Households

Answer 19

Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.

Question 20

Businesses

Answer 20

Economic entities (firms) that purchase resources and provide goods and services to the economy.

Question 21

Sole Proprietorship

Answer 21

An unincorporated firm owned and operated by one person.

Question 22

Partnership

Answer 22

An unincorporated firm owned and operated by two or more persons.

Question 23

Corporation

Answer 23

A legal entity (“person”) chartered by a state or the Federal government that is distinct and separate from the individuals who own it.

Question 24

Product Market

Answer 24

A market in which products are sold by firms and bought by households.

Question 25

Resource Market

Answer 25

A market in which households sell and firms buy resources or the services of resources.