Chapter 20 Vocabulary

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

Laisses-Faire Capitalism

Answer 2

A hypothetical economic system in which the government’s economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets in which only mutually agreeable transactions take place between buyers and sellers; sometimes referred to as “pure capitalism.”

Question 3

Command System

Answer 3

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; socialism; communism.

Question 4

Market System

Answer 4

(1) An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism. (2) All the product and resource markets of a market economy and the relationships among them.

Question 5

Market

Answer 5

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

Question 6

Private Property

Answer 6

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

Question 7

Freedom of Enterprise

Answer 7

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

Question 8

Freedom of Choice

Answer 8

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 the manner that they prefer.

Question 9

Self-Interest

Answer 9

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

Question 10

Competition

Answer 10

The effort and striving between two or more independent rivals to secure the business of one or more third parties by offering the best possible terms.

Question 11

Specialization

Answer 11

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 12

Division of Labor

Answer 12

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 13

Medium of Exchange

Answer 13

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 14

Barter

Answer 14

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

Question 15

Money

Answer 15

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

Question 16

Consumer Sovereignty

Answer 16

The 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 17

Dollar Votes

Answer 17

The “votes” that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available.

Question 18

Creative Destruction

Answer 18

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

Question 19

Invisible Hand

Answer 19

The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.

Question 20

Circular Flow Diagram

Answer 20

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 21

Households

Answer 21

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 22

Businesses

Answer 22

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

Question 23

Sole Proprietorship

Answer 23

An unincorporated firm owned and operated by one person.

Question 24

Partnership

Answer 24

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

Question 25

Corporation

Answer 25

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

Question 26

Product Market

Answer 26

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

Question 27

Resource Market

Answer 27

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

Question 28

Residential Claimant

Answer 28

In a market system, the economic agent who receives (is claimant to) whatever profit or loss remains (is residual) at a firm after all other input providers have been paid. The residual is compensation for providing the economic input of entrepreneurial ability and flows to the firm’s owners.