Q2: economic systems Flashcards
Three Basic Economic Questions
- What goods and services should be produced?
- How should these goods and services be produced?
- Who consumes these goods and services?
Economic System
the structure of methods and principles a society uses to produce and distribute goods and services
Factor Payments
the income people receive in return for supplying factors of production
Profit
the amount of money a business receives in excess of its expenses
Efficiency
Trying to maximize what can be produced with resources available. the goal is to reduce waste and accurately assess what people need/want.
Security
Ideally, economic systems seek to reassure people that goods and services will be available when needed, and they expected payments will arrive on time.
Safety Net
a set of programs to protect people who face unfavorable economic conditions such as layoffs, injuries, or natural disasters.
Standard of Living
a nation’s level of economic prosperity. Standard of Living = GDP/Total Population
Innovation
the process of bringing new methods, products, or ideas into use.
Traditional Economy
Relies on habit, custom, or ritual to answer the three basic economic questions. Little room for innovation or change. Revolves around the family unit and work is divides on gender lines. Small and close communities. Can be successful if they meet their own needs, but can’t deal with environmental disaster.
Market
any arrangement that allows buyers and sellers to exchange things. eliminate the need for any one person to be self-sufficient.
Specialization
the concentration of the productive efforts of individuals and businesses on a limited number of activities. Ex: a baker specializes in making cakes and cookies, not making cars. Leads to efficiency.
Free Market Economy
In a free market economy, the three basic questions are answered by voluntary exchange in markets. The choices made by individuals determine what gets made, how it is made, and how much people can consume of it. AKA capitalist economies. (US system)
Household
a person or group of people living in a single residence. The consumers of goods and services.
Firm
an organization that uses resources to produce a product or service, which it then sells. The ones who make the goods and services.
Circular flow model of a market economy
Households on one side, firms on the other. Physical flow goes from households to firms in the factor market, and then goes back to households in the product market. Monetary flow goes from firms to households in the factor market, then goes back to firms in the product market.
Factor Market
Firms purchasing factors of production from households. Ex when firms purchase or rent land, hire workers, or borrow money.
Product Market
Households buying the goods and services that firms produce.
Adam Smith
a Scottish social philosopher. published The Wealth of Nations which described how markets function.
Self-Interest
According to Adam Smith, all people (buyers and sellers) act out of their own personal gain, however this leads to the invisible hand and is therefore a good thing.
Incentive
the hope of reward or fear of penalty that encourages a person to behave in a certain way. Many are monetary.
Competition
The idea that consumers want things at low prices, but a profit still needs to be made and companies want to make more than other companies in their same industry–so it’s a fine line for companies.
The Invisible Hand
The idea by Adam Smith that because everyone works out of their own self interest, this in turn creates good economic and social benefits without effort to do so. It is simply an “invisible” hand pushing things that way.
Advantages of a Free Market
1. Economic Efficiency – self regulating 2. Economic Freedom 3. Economic Growth 4. Additional Goals – wide variety of goods and services: consumer sovereignty.
Consumer Sovereignty
Consumers have the power to decide what gets produced because producers strive to meet consumer’s desires.
Disadvantages of Central Planning
1. Economic Efficiency – workers lack incentive to work faster 2. Economic Freedom – discourages competition 3. Economic Growth – must-follow government plans 4. Economic Equity – shortages and poorly made goods 5. Additional Goals – can guarantee jobs and income
Laissez Faire
the doctrine that government generally should not intervene in the marketplace.
