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44 Cards in this Set

  • Front
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Economic System
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.
Each particular economic system determines:
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.
Economic systems differ as to:
1. Who owns the factors of production.

2. The method used to motivate, coordinate, and direct economic activity.
2 Main types of economic systems:
1. The command system.

2. The market system.
The Command System
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).
The Market Economy
An economic system of private ownership which allows price to determine how scarce resources are allocated (Capitalism).
In pure capitalism (laissez-faire capitalism) government's role would be limited to:
1. Protecting private property.

2. Establishing an appropriate market system environment.
Characteristics of the Market System:
1. Private property ownership.

2. Freedom of enterprise and freedom of choice.

3. Self-interest.

4. Competition.

5. Markets and prices.
Property rights encourage:
1. Investment.

2. Innovation.

3. Exchange.

4. Maintenance of property.

5. Economic growth.
Freedom of enterprise
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.
Freedom of choice
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.
Self-interest
That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
Competition
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).
Inherent in competition is the diffusion of _______.
power
Market
An institution or mechanism that brings buyers and sellers into contact.
The coordinating mechanism of capitalism is a system of...
markets and prices.
Monetary rewards are the motivation for:
1. Emerging technologies.

2. The most efficient and effective use of capital goods.
Specialization
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.
Division of Labor
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.
3 Ways the division of labor contribute to a society's output:
1. Specialization makes use of differences in ability.

2. Specialization fosters learning by doing.

3. Specialization saves time (shifting from one task to another).
Geographic Specialization
The specialization of those in a geographic area to produce goods for which their resources are best suited (Florida - citrus, Nebraska - grains).
Money
Any item that is acceptable to sellers in exchange of goods and services (medium of exchange).
Barter
The exchange of one good or service for another good or service.
5 Fundamental questions for economies:
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?
Consumer Sovereignty
Consumers' direction of production through their dollar votes.
In a market economy, how will the goods and services be produced?
In ways that minimize the cost per unit of output.
In a market economy, who will get the goods and services?
Those who are willing and able to pay the price.
In a market economy, how will the system accommodate change?
Changes in consumer taste will affect changes in prices and profits, and cause the output to be adjusted.
In a market economy, what are the two ways the system promotes progress (economic growth and higher standard of living)?
1. Technological Advancement.

2. Capital Accumulation.
An entrepreneur that introduces a new popular product will gain profit at the expense of ________.
competitors
Creative Destruction
The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies.
Dollar voting applies to both:
1. Consumer goods.

2. Capital goods.
Dollar voting for capital goods is registered by:
1. Entrepreneurs.

2. Business owners.
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.
"invisible hand"
3 Virtues of the market system:
1. Efficiency (promotes the efficient use of scarce resources).

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

3. Personal Freedom
2 Major problems that are causing the demise of the Command System:
1. The coordination problem (impossible for central planners to coordinate all efforts of production).

2. The incentive problem (lack of hard workers and innovation).
The dynamic market economy creates...
continuous, repetitive flows of goods and services, resources, and money.
Circular Flow Diagram
An illustration showing the flow of resources from households to firms and of products from firms to households. (money's reverse flows).
Resource Market
A market in which households sell and firms buy resources or the services of resources.
Households (that is, people) own all resources directly as ________ or indirectly as ________ of businesses.
workers, owners
Businesses buy _______ and sell _______.
resources, products
Households buy _______ and sell _______.
products, resources
Product Market
A market in which products are sold by firms and bought by households.
______ ______ eliminates the possibility that resource arrangements will be random (because of the market system).
Private property