ECON MIDTERM CHAPTER 2 – Flashcards
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economic system
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a particular set of institutional arrangements and a coordinating mechanism
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economic systems differs as to....
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who owns the factors of production and the method used to motivate, coordinate, and direct economic activity
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laissez faire capitalism
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french for let it be - "pure capitalism" gov econ role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets with only transactions between buyers and sellers
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command system
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opposite of laissez faire; gov owns most property resources and economic decision making is set by a central econ plan created and enforced by the gov
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market system
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mostly utilized; "capitalism" ; mixture of centralized gov econ initiatives and decentralized actions taken by individuals and firms
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pure capitalism is know as ___________ capitalism as well.
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laissez faire
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communism is an example of?
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command system
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the millions of decisions made by households and businesses are highly coordinated with one another by _____ and _________.
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markets;prices
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what is private property a characteristic of?
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market system
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private property
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the right of a private persons and firms to obtain, own, control, employ, dispose of, land, capital, and other property
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_________ property helps to facilitate exchange in a free market system
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private
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what is characterized by the private ownership of resources and the use of markets to coordinate and direct economic activity?
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market system
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in a market system, ________ create powerful incentives for firms to innovate and entrepreneurs to pioneer new products and processes.
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monetary rewards
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the gov plays a _____ role in the US and most other countries in terms of capitalism
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substantial
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freedom of enterprise
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ensure that entrepreneurs and private business owners are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets
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freedom of choice
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enables owners to employ or dispose of their property and money as they see fit. It also allows workers to try to enter ant line of work in which they are qualified. It also ensures that consumers are free to buy the goods and services that best satisfy their wants and what their budgets allow.
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self interst
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the motivating force of the carious economic units as they express their free choices
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competition
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freedom of choice exercised in pursuit of a monetary return
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competition requires what?
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two or more buyers/sellers acting independtly in a particular product or resource market; freedom of sellers and buyers to enter or leave markets
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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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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
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division of labor
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HUMAN SPECIALIZATION;the separation of the work required to produce a product into a number of different tasks that are performed by different workers
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how does specialization contribute to society? (3 ways)
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(1) makes use of differences in ability (2) fosters learning by doing (3) saves time
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medium of exhange
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makes trade easier; any item sellers generally accept and buys generally use to pay for a good or service; MONEY
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specialization requires __________.
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exchange
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barter
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swapping goods for goods
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division of labor that works on a regional or international basis is known as ?
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geographic specialization
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which requires a coincidence of wants between a buyer and a seller?
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barter
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modern advanced industrial economies usually have an?
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active, but limited gov
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what are the 5 fundamental questions of a market system?
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(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 the change? (5) how will the system promote progress?
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the 5 fundamental questions highlight what?
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economic choices underlying the PPC
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what do the 5 fundamental questions reflect?
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the reality of scarce resources in a world of unlimited wants
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consumer sovereignty (in command)
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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
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a market system decides on what to produce based on?
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continued economic profit from producing a good or service, total revenue exceeding total costs in the production of a good or service, and the movement of resources toward an industry that exhibits continued profits from producing a good or service
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which best describe how goods and services will be produced
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by utilizing the right mix of labor and capital, and by locating production facilities
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goods and services are produced effectively when production is organized in combos and way:
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that minimize the cost per unit of output
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competition eliminates _________.
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high-cost producers
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through ________ production, firms must employ the most economically efficient technique of production in producing their output
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least-cost
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invisible hand
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the tendency of competition to cause individuals and firms to unintentionally but effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests
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efficiency
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promotes the efficient use of resources by guiding them into the production of the goods and services most wanted by society, the market encourages the development and adoption of new and more efficient production techniques, and forces the use of techniques in organization
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incentives
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encourages hard work, acquisition, and innovation; which all means high incomes and greater production translating into a higher standard of living - risks can result in substantial profit incomes - generate economic rewards
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the command economies of the former Soviet Union and of Eastern Europe failed due to:
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coordination problems and incentive problems
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the _______ describes a situation faced in command economies in which producers have no reason to adjust production in response to shortages and surpluses in the economy.
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incentive problem
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moving up the hierarchy of the communist party, individuals could obtain ?
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better housing, health care, shop in special stores
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business success in the command economies of the former Soviet Union, Eastern Europe, and Chine prior to market reforms was based on:
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political savvy
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circular flow diagram
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illustrates those flows for a simplified economy in which there is no gov
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household
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spend income in the product market and firms
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product market
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the place where goods and services produced by businesses are brought and sold
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businesses
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commercial establishments that attempt to earn profits for owners
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resource market
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households sell resources to businesses;
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what markets do households obtain the income needed to buy the goods and services?
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labor, resource, and capital
