Chapter 2: The Market System and the Circular Flow Flashcards
Economic system
A set of institutional arrangements and a coordinating mechanism to respond to the economizing problem. Has two polar extremes, the command system and the market system
2.1
Command system
A.K.A socialism or communism. In this system, the government owns most property resources and economic decision making occurs through a central economic plan. Two countries still use this system today, North Korea and Cuba
2.1
Market system
A.K.A capitalism. A system characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.
2.1
Markets
Places where buyers and sellers come together to buy and sell goods, services, and resources
2.1
laissez-fair
Pure, stands for “let it be”. Is used to refer to a true market system where the government has no control over the economy
2.1
Private property
Extensive private ownership of capital
2.1
The 4 benefits of property rights
- Encourages people to cooperate by ensuring only mutually agreeable economic transactions take place
- Encourages investment, innovation, exchange, maintenance of property, and economic growth
- Extends to intellectual property through patents, copyrights, and trademarks
- Facilitates exchange
2.1
Freedom of enterprise
Ensures 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
2.1
What freedom of choice allows and enables
Enables owners to employ or dispose of their property and money as they see fit. Allows workers to try and enter any job that they are qualified for. Ensures consumers are free to buy goods and services to satisfy their wants
2.1
Self interest
A motivating force of the various economic units in the market system as they express their free choices. Means that each economic unit tries to achieve its own particular goal, which usually requires delivering something of value to others.
2.1
Competition
Something the market system depends on to work. Requires two or more buyers and two or more sellers acting independently in a particular product or resource market and the freedom of sellers and buyers to enter or leave markets, on the basis of their economic self interest
2.1
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 goods and services.
2.2
Division of labor
Human specialization that contributes to a society’s output in several ways:
- Specialization makes use of differences in ability.
- Specialization fosters learning by doing.
- Specialization saves time.
2.2
Medium of exchange
Makes trade easier. Ex: money
2.2
Barter
Swapping goods for good. Ex: wheat for oranges.
2.2
Money
A convenient social invention to facilitate exchanges of goods and services. It is socially defined, whatever society accepts, as a medium of exchange is money.
2.2
The five fundamental questions of the economy
- What goods and services will be produced?
- How will the goods and services be produced?
- Who will get the goods and services?
- How will the system accommodate change?
- How will the system promote progress?
2.3
Consumer sovereignty
Crucial in determining the types and quantities of goods produced. consumers spend their income on the goods they are most willing and able to buy.
2.3
“Dollar votes”
What consumers spend their income on designates what their wants are in the market
2.3
Creative destruction
The creation of new products and production methods completely destroys the market positions of firms that are welded to existing products and older ways of doing business.
Ex: Roku replacing CD’s
2.3
Invisible hand
Simultaneously promoting the public or social interest
2.4
How the market system is efficient
Promotes the efficient use of resources by guiding them into the production of the goods and services most wanted by society. It forces the use of the most efficient techniques in organizing resources for production and producing things efficiently.
2.4
What are the market systems incentives
Encourages skill acquisition, hard, work, and innovation
2.4
Circular flow diagram
Illustrates the flow of goods and services, resources, and money for a simplified economy in which there is no government
2.4
Households
One or more persons occupying a housing unit. They buy the goods and services that businesses make and sell resources in the resource market.
2.4
Businesses
Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale. Falls into three categories, a sole proprietorship, a partnership, and a corporation.
2.4
Sole proprietorship
A business owned and managed by a single person
2.4
Partnership
A business owned and managed by two or more individuals that share profits and losses
Corporation
Independent legal entity that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and engage in any legal business activity
Ex: Google, Ford, Walmart
2.4
Product market
The place where the goods and services produced by businesses are bought and sold
2.4
Resource market
Where households sell resources to businesses
2.4
