AP Economics Unit 1, Chapter 2: The Market System and Circular Flow – Flashcards
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economic system
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a particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem
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command system
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a type of economic system in which the government owns most property resources, such as corporations, and economic decision making occurs through a central economic plan, with the division of output between capital and consumer goods centrally decided
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market system
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a type of economic system of private ownership of resources and the use of individualized self-interest to achieve individualized economic goals through work, competition, consumption, and production; economic decision making is widely dispersed and economic goals allow for entrepreneurs to flourish
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private property
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the private individuals and firms that own most of the property resources, encouraging investment, innovation, and economic growth
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freedom of enterprise
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the freedom of entrepreneurs and businesses to freely obtain and use economic resources to produce goods and sell them in chosen markets
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freedom of choice
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the freedom of owners to employ or dispose of property, money, and workers as they see fit; also, the freedom of consumers to buy whatever (legal) goods and services that they want
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self-interest
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each economic unit tries to advance its own particular goal by delivering something of value to others
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competition
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the freedom of choice exercised in the pursuit of monetary return, diffusing economic power and eliminating abuse of economic power; the regulatory mechanism of the market system
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market
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an institution or mechanism that brings buyers and sellers into contact
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specialization
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the use of resources of an individual, a firm, a region, or a nation to produce one or a few goods and services rather than a whole bunch of them
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division of labor
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the specialization of human beings, saving time and making use of differences in ability
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medium of exchange
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the function of money to make trade easier when you can't barter
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barter
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swapping goods for goods, requiring buyer and seller to have same wants
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money
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the convenient social invention to facilitate exchanges if goods and services, taking on a variety of forms
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consumer sovereignty
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the assertion that consumers lead the market system
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creative destruction
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the creation of new products and production methods that completely destroys the market positions of older firms with older ways of doing business, allowing for the rapid spread of new technologies
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invisible hand
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the phenomenonadvancement of public interests through private competition and self-interest in a market system
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the coordination problem
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the difficulty of planning and coordinating outputs of industries in command systems, due to chain reactions, sophistication of industries, and inefficiency
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the incentive motive
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the difficulty posed by the lack of incentives in command systems
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circular flow diagram
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simple economic model describing the flow of resources and products between businesses and households; the businesses expend costs from the resource market and obtaining revenue from the product market and the households expend factors of production into the resource market and obtaining products from the products market
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resource market
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place where resources or services of resource providers and bought and sold; households sell resources and businesses buy them
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product market
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place where goods and services are bought and sold; businesses sell resources and households buy them
