Microeconomics, Mcconnell, 18Ed., Chapter 2

Front 1

Economic System

Back 1

A set of institutional arrangements for solving the economizing problem; a method of organizing the economy, of which the market system and the command system are the two general types.

Front 2

Each particular economic system determines:

Back 2

1. What goods are produced.

2. How they are produced.

3. Who gets them.

4. How to accommodate change.

5. How to promote technological progress.

Front 3

Economic systems differ as to:

Back 3

1. Who owns the factors of production.

2. The method used to motivate, coordinate, and direct economic activity.

Front 4

2 Main types of economic systems:

Back 4

1. The command system.

2. The market system.

Front 5

The Command System

Back 5

A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct economic activity (Socialism or Communism).

Front 6

The Market Economy

Back 6

An economic system of private ownership which allows price to determine how scarce resources are allocated (Capitalism).

Front 7

In pure capitalism (laissez-faire capitalism) government's role would be limited to:

Back 7

1. Protecting private property.

2. Establishing an appropriate market system environment.

Front 8

Characteristics of the Market System:

Back 8

1. Private property ownership.

2. Freedom of enterprise and freedom of choice.

3. Self-interest.

4. Competition.

5. Markets and prices.

Front 9

Property rights encourage:

Back 9

1. Investment.

2. Innovation.

3. Exchange.

4. Maintenance of property.

5. Economic growth.

Front 10

Freedom of enterprise

Back 10

The freedom of firms to obtain resources, produce products or services of their choosing, and sell those products or services in the market of their choice.

Front 11

Freedom of choice

Back 11

The freedom of individuals to employ or dispose of personal property as they choose, of workers to seek any line of work that they choose, and of consumers to spend their incomes as they choose.

Front 12

Self-interest

Back 12

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

Front 13

Competition

Back 13

The presence of independent buyers and sellers acting in their self-interest to obtain or dispose of goods or services in a free market. (The regulatory force in a market system).

Front 14

Inherent in competition is the diffusion of _______.

Back 14

power

Front 15

Market

Back 15

An institution or mechanism that brings buyers and sellers into contact.

Front 16

The coordinating mechanism of capitalism is a system of...

Back 16

markets and prices.

Front 17

Monetary rewards are the motivation for:

Back 17

1. Emerging technologies.

2. The most efficient and effective use of capital goods.

Front 18

Specialization

Back 18

The use of the resources of an individual, firm, region, or nation to concentrate production on one or a small number of goods or services.

Front 19

Division of Labor

Back 19

The separation of the work required to produce a product into a number of different tasks that are performed by a number of different workers.

Front 20

3 Ways the division of labor contribute to a society's output:

Back 20

1. Specialization makes use of differences in ability.

2. Specialization fosters learning by doing.

3. Specialization saves time (shifting from one task to another).

Front 21

Geographic Specialization

Back 21

The specialization of those in a geographic area to produce goods for which their resources are best suited (Florida - citrus, Nebraska - grains).

Front 22

Money

Back 22

Any item that is acceptable to sellers in exchange of goods and services (medium of exchange).

Front 23

Barter

Back 23

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

Front 24

5 Fundamental questions for economies:

Back 24

1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will get the goods and services?
4. How will the system accommodate change?
5. How will the system promote progress?

Front 25

Consumer Sovereignty

Back 25

Consumers' direction of production through their dollar votes.

Front 26

In a market economy, how will the goods and services be produced?

Back 26

In ways that minimize the cost per unit of output.

Front 27

In a market economy, who will get the goods and services?

Back 27

Those who are willing and able to pay the price.

Front 28

In a market economy, how will the system accommodate change?

Back 28

Changes in consumer taste will affect changes in prices and profits, and cause the output to be adjusted.

Front 29

In a market economy, what are the two ways the system promotes progress (economic growth and higher standard of living)?

Back 29

1. Technological Advancement.

2. Capital Accumulation.

Front 30

An entrepreneur that introduces a new popular product will gain profit at the expense of ________.

Back 30

competitors

Front 31

Creative Destruction

Back 31

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

Front 32

Dollar voting applies to both:

Back 32

1. Consumer goods.

2. Capital goods.

Front 33

Dollar voting for capital goods is registered by:

Back 33

1. Entrepreneurs.

2. Business owners.

Front 34

In the book, The Wealth of Nations, Adam Smith claims that while we pursue self-interest in a free market system, the ________ ______ promotes the public or social interest.

Back 34

"invisible hand"

Front 35

3 Virtues of the market system:

Back 35

1. Efficiency (promotes the efficient use of scarce resources).

2. Incentives (encourages skill acquisition, hard work, and innovation).

3. Personal Freedom

Front 36

2 Major problems that are causing the demise of the Command System:

Back 36

1. The coordination problem (impossible for central planners to coordinate all efforts of production).

2. The incentive problem (lack of hard workers and innovation).

Front 37

The dynamic market economy creates...

Back 37

continuous, repetitive flows of goods and services, resources, and money.

Front 38

Circular Flow Diagram

Back 38

An illustration showing the flow of resources from households to firms and of products from firms to households. (money's reverse flows).

Front 39

Resource Market

Back 39

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

Front 40

Households (that is, people) own all resources directly as ________ or indirectly as ________ of businesses.

Back 40

workers, owners

Front 41

Businesses buy _______ and sell _______.

Back 41

resources, products

Front 42

Households buy _______ and sell _______.

Back 42

products, resources

Front 43

Product Market

Back 43

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

Front 44

______ ______ eliminates the possibility that resource arrangements will be random (because of the market system).

Back 44

Private property