Macroeconomics - Ch 2 Flashcards
Command system
Socialism/communism; gov’t owns most property resources & economic decision making occurs thru a central economic plan
Economic system
Particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem
Markets
Places where buyers (demanders) and sellers (suppliers) come together to buy & sell goods, services, & resources
Market system
Capitalism; private ownership of resources and the use of markets and prices to coordinate and direct economic activity; participants act in own self-interest; *Efficiency, incentives, freedom
Pure/laissez-faire capitalism
Gov’ts role limited to protecting property & establishing an environment appropriate to the operation of the market system; laissez-faire = “let it be” (keep gov’t from interfering with the economy
Private property
Coupled with freedom to negotiate binding legal contracts, enables individuals & businesses to obtain, use, & dispose of property resources as they see fit
Freedom of enterprise
Ensures that entrepreneurs and private biz are free to obtain and use economic resources to produce their choice of goods & services and to sell them in their chosen markets
Freedom of choice
Enables owners to employ or dispose of their property and money as they see fit; allows workers to try to enter any line of work for which they are qualified; ensures consumers are free to buy goods/services that best satisfy their wants & that their budget allows
Self-interest
Motivating force of the various economic units as they express their free choices; each Econ unit to achieve its own particular goal, which usually requires delivering something of value to others
Competition
Requires 2+ buyers & 2+ sellers acting independently in a particular product or resource market & freedom of sellers & buyers to enter/leave markets on the basis of their Econ self-interest; = regulatory mechanism of market system
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
Division of labor
human specialization; makes use of differences in ability; fosters learning by doing; saves time
Medium of exchange
usually = money; makes trade easier; convenient social invention to facilitate exchanges of goods and services
Barter
Swapping goods for goods; poses serious problems b/c it requires a “coincidence of wants” between the buyer and the seller
Profits/losses
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
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 (“dollar votes”)
Least cost production
Firms must employ the most economically efficient technique of production in producing their output
Creative destruction
the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business
“Invisible Hand”
Adam Smith (The Wealth of Nations, 1776),: operation of a market system creates a curious unity between private interests and social interests; firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system will simultaneously promote the public or social interest
Demise of the command system
Problem with coordination and incentive
Circular Flow Diagram
Flows for a simplified economy where there is no government; resources flow from households to businesses; products flow from businesses to households; monetary flows opposite directions –> households receive incomes from businesses though resource market, businesses receive revenue from households through product market
Households
one or more persons occupying a household unit; ~ 116 million in US
Businesses
Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale; 3 categories (sole proprietorship, partnership, corporation)
Sole proprietorship
Business owned and managed by a single person
Partnership
2+ individuals agree to own and operate a business together; pool resources and share profits/losses
Corporation
independent legal entity that can, on its own behalf, acquire resources, own assets, produce/sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activity
Product Market
place where the goods and services produced by businesses are bought and sold
Resource Market
Households sell resources to businesses
