Chapter 2: The Market System and the Circular Flow Flashcards
What is laissez-faire capitalism?
A hypothetical economic system where the government’s role is limited to protecting private property and enforcing contracts, allowing markets to operate freely with mutually agreeable transactions between buyers and sellers.
What is a command system?
An economic system where property resources are publicly owned, and the government centrally plans and coordinates economic activities; often associated with socialism and communism.
What is the market system?
An economic system where individuals own most economic resources, and markets and prices serve as the primary mechanism for resource allocation; associated with capitalism.
What rights are associated with private property in the market system?
The right to own, control, employ, dispose of, and bequeath property, which encourages investment, innovation, and economic growth, and protects intellectual property through patents, copyrights, and trademarks.
What does freedom of enterprise and choice mean in a market system?
Entrepreneurs and businesses can freely use resources to produce and sell goods, workers can choose jobs, and consumers can purchase goods to satisfy their needs within legal limits.
How does self-interest drive economic activity in the market system?
Economic units act based on self-interest, with entrepreneurs seeking profits, property owners aiming for high returns, and consumers looking for the best deals.
Why is competition important in the market system?
Competition involves multiple independent buyers and sellers, prevents monopolies, and ensures flexibility in response to changes in consumer demand, technology, and resources.
How do markets and prices coordinate economic activity?
Prices adjust based on supply and demand, guiding resource allocation by expanding profitable activities and contracting unprofitable ones.
What role do technology and capital goods play in the market system?
The market system rewards innovators, encouraging the development and use of advanced capital goods to increase production efficiency.
How does specialization benefit the market system?
Specialization increases efficiency by focusing on specific goods or services, enabling individuals, firms, and nations to trade for other products.
Why is money important in a market economy?
Money facilitates trade by eliminating the need for barter, making exchange easier and more efficient.
What is the role of government in the market system?
The government intervenes to correct market failures, though excessive intervention can lead to resource misallocation.
What is the ‘invisible hand’ in a market system?
The concept that competition causes individuals and firms to unintentionally promote society’s interests while pursuing their own self-interest.
What does the circular flow model represent?
It illustrates the continuous flow of goods, services, resources, and money between households and businesses in a dynamic market economy.
How does the market system deal with business risk?
The profit-and-loss system encourages owners to manage risks, while shielding employees and suppliers from the financial consequences of poor decisions.
