Chapter 2 : The Market System and the Circular Flow Flashcards
What is an economic system?
a particular set of instructional arrangements and a coordinating mechanism
What does an economic system respond to?
the economizing problem
How do economic systems differ?
who owns the factors of productions and the method used to motivate, coordinate, and direct economic activity
What do economies that have a market system do?
utilize some mixture of centralized government regulation and decentralized markets and prices
What is the other word for a market system?
mixed economy
What is the lassies-faire capitalism also known as?
Pure capitalism
What is lassies-faire capitalism?
when the government’s role would be limited to protecting private property from theft and aggression and establishing a legal environment in which contracts would be enforced and people could interact in markets to buy and sell goods, services, and resources.
What is the lassies-faire economics phrase?
“let it be”
What is a command system?
where government owns most property resources and economic decision making is set by a central government plan created and enforced by the government
What is a command system also known as?
socialism or communism
What do the vast majority of the world’s economies use?
the market system
What is the market system also known as?
capitalism or the mixed economy
What happens in the market system?
individuals and businesses seek to achieve their economic goals through their ow decisions regarding work, consumption, and production
What is a market?
a place where buyers and sellers come together to buy and sell goods, services, and resources
What is there an incentive to do in a market system?
innovate
T/F: The government plays a substantial role in the economy in the market system
True
What enables individuals and businesses to obtain, use, and dispose of property resources as they see fit.
The right of private property, coupled with the freedom to negotiate binding legal contracts
What does private property encourage people to do?
to cooperate by helping to ensure that only mutually agreeable economic transactions take place
What does property rights extend to?
intellectual property through patents, copyrights, and trademarks
What do property rights facilitate?
exchange
What does freedom of enterprise ensure?
that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.
What does freedom of choice enable owners to do?
employ or dispose of their property and money as they see fit
What does freedom of choice allow workers to do?
to enter any line of work for which they are qualified
What does freedom of choice ensure to consumers?
that they are free to buy the goods and services that best satisfy their wants and that their budgets allow
What is self-interest in the market system?
the motivating force of the various economic units as they express their free choices
What does the market system depend on?
competition among economic units
What does competition require?
two or more buyers and two or more sellers acting independently in a particular product or resource market, and freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest.
What is a market?
an institution or mechanism that brings buyers (“demanders”) and sellers (“suppliers”) into contact
What does competition, freedom of choice, self-interest, and personal reward provide?
the opportunity and motivation for techniological advance
What are complex capital goods
tools, machinery, large-scale factories, and facitlities for storage, communication, transportation, and marketing
What is specialization?
using the resources of an individual, firm, region, or nation to produce one or few goods or services rather than the entire range of gods and servicesWhat
How does human specialization (or division of labor) contribute to society’s output?
specialization makes use of differences in ability, fosters learning by doing, saves time, and also works on a regional and International basis
What is money?
a medium of exchange
What is barter
swapping goods for goodsW
What does barter require?
a confidence of wants between the buyer and the seller
What is the definition of money?
a convenient social to facilitate exchanges of goods and services
What must money be?
generally acceptable to sellers in exchange for their goods and services.
What are the 3 fundamental questions?
What goods and services will be produced, how will the goods and services be produced, and who will get the goods and services?
What are the 5 fundamental questions?
What goods and services will produce, how will the goods and services be produced, who will get the goods and services, how will the system accommodate change, and how will the system promote progress?
What is the answer to: What will be produced?
the goods and services that can be produced at a continuing profit will be produced, while those whose production generates a continuing loss will be discontinued
What are profits and losses, mathematically?
The difference between the total revenue (TR) a firm receives from the sale of its products and the total cost (TC) of producing those products
What does continuing economic profit (TR>TC) in an industry result in?
expanded production and the movement of resources toward that industry
What are continuing losses (TC>TR) in an industry lead to?
reduced production and the exit of resources from that industry
What is consumer sovereignty crucial in determining?
the types and quantities of goods produced
How do consumers register their wants?
a “dollar vote”
What must businesses math, if not?
their production choices with consumer choices or face losses and eventual bankruptcy
How will the goods and services be produced?
in combinations and ways that minimize the cost per unit of output
