Exam-1 Chapter 3 Global Economic System Flashcards
What are the basic economic questions?
What to produce?
How to produce?
Who benefits?
Economic system
A method of answering the three questions is called the economic system.
There are two primary economic systems in use today
Capitalism and socialism
No country is hundred percent of either.
A country with the features of both capitalism and socialism is called
Mixed economy
Capitalism requires
Private ownership of capital.
The questions and capitalism are answered by
The use of markets
What is the guiding motivation in capitalism?
Self-interest
Socialism
Socialism relies on the government ownership of capital, planning as the allocation mechanism of markets and social interest motivations
Markets are
Voluntary
Market provide incentives to both
The buyers and sellers because they can gain from exchange
Markets also promote
Efficiency and innovation by businesses trying to maximize their profits
Workers also have an incentive to be efficient
Because their compensation should be based on their production
Decision making in capitalism is
Decentralized
In a planned economy Who makes all the decisions?
Government agency
Why do incentives in planned economies different from those in capitalism
Since the society, not the individual, stands to gain from individual efforts.
Why do markets fail?
Markets failed because of several reasons factors notably public goods , externalities, asymmetric information, and monopoly power.
Public goods
Are nonexclusive a non-rivalrous.
They are under produced by markets because people can free ride.
When do externalities occur?
When a transaction brings cost or benefits to someone other than those directly involved in the transaction.
Name two types of externalities
Externalities can be either positive or negative and can result in either over or under production of a good.
Asymmetric information
Occurs hen either the buyer or seller knows important information about an exchange that the other does not.
Asymmetric information can result in
Goods being wrongly priced or withdrawn from markets
When does monopoly power exist?
Monopoly power exist when markets are insufficiently competitive.
What are the results of monopoly power?
It may result in higher prices and inefficiency.
When does monopsony exist?
When there is one buyer of a good, it allows the monopsonist to influence prices paid.
What to produce?
Each country must choose what gets to produce with its resources.
How to produce?
Figure out steps to decide how best to produce
Who benefits?
This question is sometimes stated “for whom “the income tolls.
Or Who gets it?
England is mostly
Capitalism, but it has a large government and does some things because of traditions.
What are the two primary economic framework at work in the modern world?
Capitalism and socialism
When we say our economy is a mixed capitalism what does it mean?
Having elements of both capitalism and socialism plus pieces that are technically neither.
Capitalism in an economic system is characterized by
Private ownership of capital
Market Allocation
Self interest motivations
Capital
Capital is human made goods that are used to make other goods such as factories machinery trucks and airplanes
In a capitalist system who is allowed to own the capital and keep the money that it earns?
Private citizens
The owners of capital in capitalism
Are going to be high income folks
Market
If Market is a place where buyers and sellers come together to negotiate exchanges of Goods.
In capitalism, who decides what is made, how it is made and who gets the income?
The markets
Markets to not require
One on one negotiations
In markets there is a negotiation,
But it is a group negotiation that shows itself in where consumers shop and how much they buy
What is another name for capitalism
The price system
Who creates prices?
Markets create prices, and those prices give us the information we use to make our choices
There are markets for
More than consumer goods
In a capitalist system, people and businesses
Are supposed to do what they think is best for themselves, to be motivated by their own interest. This does not mean that capitalism ignores the social good, rather it means just the opposite.
The great British economists Adam Smith
Established the theoretical foundation of capitalism. In his theory, people who pursue their own interest will be led to do what’s best for society.
Capitalism provides an incentive for
People to work hard, to try their best, because they stand to be rewarded for doing so.
Socialism is an economic system characterized by
Government ownership of capital
Planned allocation
Social interest motivations
In a socialist system
The government owns the capital and in theory uses it for the benefit of all .
The answers to the basic economic questions in socialism comes from
The use of planning
Planned systems are sometimes called
Command economies, because economic activity is at the command of the government.
Socialism demands that
People do what is best for the society, not what is best for themselves as individuals.
Karl Marx wrote that
The system required each person to give according to his or her ability, but to be rewarded according to his or her needs.
So you do the right thing such as working hard without regard to what’s in it for you.
