Economics Unit 1; 1.1-3.3

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what does the study of economics begin with
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the idea that people can not have everything they need and want
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define need
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necessary for survival
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define want
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item we desire but do not need for survival
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to look at the world economically, we focus on
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decisions that people make
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define economics
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the study of how people seek to satisfy their needs and wants by making choices
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why must people make choices of needs and wants
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because of scarcity
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define goods
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physical objects such as shoes and shirts
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define services
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actions or activities that one person performs for another
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define scarcity
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implies limited quantities of resources to meet unlimited wants
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what is economics about solving
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the problem of scarcity
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define shortage
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occurs when producers will not or can not offer goods or services at the current prices
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scarcity ______ exists
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always
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why does scarcity always exist
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because our needs and wants are always greater than our resource supply
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why are goods and services scarce
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because they are all made from resources that are scarce
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what is another name for factors of production
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factor resources
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define factors of production or factor resources
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the resources that are used to make all goods and services
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what are the factors of production
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land, labor, and capital
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define land
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all natural resources used to produce good and services
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define natural resources
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materials found in nature
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define labor
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effort that a person devotes to a task for which that person is paid
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define capital
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any human made resource that is used to produce other goods and services
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what are two forms of capital
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physical and human
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define physical capital
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human made objects used to create other goods and services
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what is another word for physical capital
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capital goods
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define human capital
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is the knowledge and skills a worker gains through education and experience
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does an economy require both physical and human capital to produce goods and services
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yes
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define entrepreneurs
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ambitious leaders who decide how to combine land, labor, and capital resources to create new goods and services
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entrepreneurs fuel…
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economic growth
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define trade-offs
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are ALL the alternatives that we give up whenever we choose one course of action over another
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every decision we make involves
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trade-offs
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economics simplify their explanations of the trade-offs countries make by using the example of
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guns and butter
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define guns and butter
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guns stands for the military goods produced, and butter stands for the consumer goods
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define opportunity cost
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the MOST DESIRABLE alternative given up as the result of a decision. Ex. a family uses money to buy a computer instead of going on a trip. the trip is the opportunity cost of buying the computer
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decisions depend on
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opportunity cost
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with each new situation, the opportunity costs and benefits _______
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change
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define thinking at the margin
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when you decide how much more or less to do
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what is another way of saying thinking at the margin
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cost/benefit analysis
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once the opportunity cost outweighs the benefits…
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no more units should be added
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define economics
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study of how people seek to satisfy their unlimited needs and wants with limited resources by making choices
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both goods and services are either
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needs or wants
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is money an economic resource
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NO
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define economizing
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making a decision by maximizing benefits and minimizing costs
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economists often use what to analyze the choices and trade-offs that people make
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graphs
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how do graphs help economists
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helps see relationships/how things are connected
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define production possibilities curve (graph)
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a graph showing alternative ways to use an economy’s productive resources or reflects the courts current production possibilities
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what do the axes of a production possibilities curve show
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categories of good and services
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define production possibilities frontier
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a lone on a graph that shows combinations of the production of goods or services. represents an economy working at its most efficient level of production
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each point on a production possibilities frontier reflects a
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trade-off
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a production possibilities graph can show (3)
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1. how efficient an economy is 2. whether an economy has grown or shrunk 3. and the opportunity cost of a decision to produce more of one good or service
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define efficiency
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means using resources in such a way as to maximize the production or output of goods and services
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a point inside the production possibilities frontier represents
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a trade-off when not working most effiently
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any point inside the line indicates
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an underutilization of resources
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define underutilization
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using fewer resources than the economy is capable of using
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the quantity or quality of land, labor, or capital is alwyas
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changing
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if the quantity or quality of available land, labor, or capital changes then the curve
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will move
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economy grows, production possibilities curve shifts to the
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right
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does cost always mean money
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no
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define cost
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is the alternative we give up when we choose one option over another
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cost always mean
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opportunity cost
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we can use production possibilities graphs to see
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the opportunity cost involved in a decision
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define law of increasing costs
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as production switches from one item to another, more and more resources are necessary to increase production of the second item therefore increasing opportunity cost
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what does the y-axis represent
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the good decreasing in production
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what does the x-axis represent
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the good increasing in production
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the law of increasing costs explains why production possibilities frontiers
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are usually curved
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when economics collect data to create production possibility curves, they must first determine
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which goods and services a country can produce, given its current resources
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human and physical capital reflect
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technology
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economics must also assess a country technological know how
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a country’s production possibilities depend on both
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its technological level and the resources available
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define utility
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level of satisfaction in making a choice
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define diminishing marginal utility
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lowering levels of satisfaction (gets boring)
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who believed in command/communism
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Karl Marx
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where did karl marx think value came from
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what you produced NOT what you owned
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karl marx believed the owners of capital were
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exploiting their laborers. and that eventually laborers would rise up and defeat the owners and create a more equal state
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who believed in the free market system
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Adam smith
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what did Adam smith believe about the free market
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it brings markets to equilibrium and keeps markets efficient
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what concept did Adam smith believe in
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invisible hand of the market – competition and self interested behavior
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what are 3 fundamental economic questions
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1. what will be produced and in what quantity 2. how will it be produced 3. for whom will it be produced
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societies must answer the 3 fundamental economic question in order to
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create resource allocation
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define resource allocation
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a plan for using available resources
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explain “what will be produced and in what quantity”
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identifies what resources/final goods and services are valued enough by a society to be produced
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explain “how will it be produced”
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identifies the type and amount of scarce resources to be used to produce final goods and services for the society
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explain “for home will it be produced”
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identifies how resources/final goods and services will be distributed
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what are different ways of how good and services are distributed
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price, first come first served, favorites etc.
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what can a society do once they answer the 3 economic questions
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they can create an economic system
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what are 3 economics systems
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1. traditional 2. command 3. free market
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who answers the 3 EQs in traditional
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tradition
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who answers the 3 EQs in command
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government
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who answers the 3 EQs in free market
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individuals in market
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is traditional economic system common
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NO
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are some aspects of traditional still in US. economy today
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yes
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what type of decision making is command
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top down decision making
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what type of decision making is free market
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bottom up
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is the free market apparent in the U.S. today
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YES. VERY
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is command apparent in the U.S. economy
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a little
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what makes up 95% of economic systems
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socialism and mixed market (capitalism)
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what is another name for mixed market
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capitalism
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communism is which economic system
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command
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socialism is which kind of economic system
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50-50 split between command and free market
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mixed market (capitalism) is what kind of economic system
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free market
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country with communism
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north Korea
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country with socialism
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Sweden
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country with mixed market
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U.S.
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scarcity forces society and nations to
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answer economic questions
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different economic systems have evolved in response to
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the problem of scarcity
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define economic system
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the method used by a society to produce and distribute goods and services
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which economic system a society employs depends on
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that society;s goals and values
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societies must decide what to produce in order to
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satisfy its needs and wants
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because of limited resources, each production decision comes at an
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opportunity cost
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how goods and services are distributed is determined by
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how societies choose to distribute income
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define factor payments
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the income people receive for supplying factors of production (land labor capital or entrepreneurship)
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what are 6 economic goals
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1. economic efficiency 2. economic freedom 3. economic security and predicability 4. economic equity 5. economic growth and innovation 6. other goals
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define economic efficiency
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making the most of resources
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define economic freedom
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freedom from government intervention in production and distribution of goods and services
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define economic security and predictability
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assurance that goods and services will be available, payment made on time, and safety in economic disaster
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define economic equity
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fair distribution of wealth
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define economic growth and innovation
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innovation = economic growth; economic growth = higher standard of living
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define other goals
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societies pressure additional goals, such as environmental protection
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define patriotism
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the love of one’s country/the passion to serve their country, either defending it from invasion or protecting its right and maintaining its laws and institutions
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define safety net
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set of government programs that protect people experiencing unfavorable economic conditions
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define standard of living
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level of economic prosperity
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innovations in technology increase…
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efficiency of production and usher in new goods and services
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all nations must prioritize their
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economic goals
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achieving any kind of economic goal comes with some kind of
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economic trade-off
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4 types of ECONOMIES
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1. traditional economy 2. market economy 3. command economy 4. mixed economy
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define traditional economy
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relies on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it. little room for change
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define market economy
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economic decisions are made by individuals and are based on exchange, or trade
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define command economy
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central authority is in command of the economy
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define mixed economy
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market based economic system in which government plays a limited role
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traditional economic system revolves around
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family
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tradition economies are small and close
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traditional economies work to support
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entire groups rather than themselves
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what are important to traditional economies
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agriculture and hunting
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do traditional economies have many backups in case of environmental disaster
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NO
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traditional economies resist
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change
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in market economices, choices are made by
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individuals
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what are 2 other names for market economies
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free markets or capitalism
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define centrally planned economy
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the central government alone decides how to answer the 3EQs
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centrally planned economies are AKA
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command economies
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what is the most modern economy
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mixed economies
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define market
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an arrangement that allows buyers and sellers to exchange things
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markets allow us to exchange…
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the things we have for the things we want
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markets exist because no one is
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self sufficient
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specialization
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the concentration of the productive efforts of individuals and firms on a limited number of activities
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specialization leads to
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efficient use of resources
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economic system that are based on voluntary exchanges in markets are called
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free market economies
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in a free market economy, individuals and businesses use ______ to exchange money and products
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markets
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in free market economy individuals and privately owned businesses own… (3)
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1. factors of production 2. what they make 3. and what they buy
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what kind of economy is the U.S.
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free market
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free market economy can be shown by a
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circular flow chart
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on a circular flow chart, inner ring =, outer ring =
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flow of resources and products, flow of money
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the players in the free market economy are
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house holds and firms
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define households
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a person or group of people living in the same residence
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households gives firms
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factor resources
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define firm
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or business, is an organization that uses resources to produce a product which it then sells
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firms give households
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products
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household own factors of production (land, labor, and capital)
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firms transform _____ or factors of production into ________ or products
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inputs, outputs
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firms buy _____ _______ _____ from household
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factors of production
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define factor market
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the arena of exchange where firms buy factors of production from households
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define profit
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the financial gain made in a transaction
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define product market
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where goods and services that firms produce are purchased by households
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household purchase product made by first with
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the money they received from firms in the factor market
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the flow between the factor market and the product market is
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circular
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according to Adam smith, it is ________ and our own _________ that keep the marketplace functioning
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competition, self-interests
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adam smith was a sottish philosopher who published
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the wealth of nations
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the wealth of nations describes
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how the market functions
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economy is made of countless
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individual transitions
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define self-interest
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their own personal gain
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self interest is the ________ _______ in the free market
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motivating force
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define incentive
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the hope of reward or the fear of punishment that encourages a person to behave in a certain way
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people respond predictably to
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positive and negative incentives
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define competition
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struggle among producers for the dollars of consumers
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competition is the _______ _____ behind the free market
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regulating force
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2 types of incentives
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1. monetary 2. non monetary
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define monetary
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an incentive that rewards in the form of money EX. profit
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define non monetary
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reward consumers and businesses in other way such as gifts, serves, and other goods
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self interest and competition work ________
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together
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self interest spurs consumers to
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purchase certain goods and services and firms to produce them
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competition causes more ________ and _____ firms’ quests for higher prices
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production, moderates
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define invisible hand
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a phenomenon in which consumers get products they want at prices that reflect cost of production which all occurs without central plan or direction
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4 advantages of the free market
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1. economic efficiency 2. economic freedom 3. economic growth 4. additional goals
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free markets encourage
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growth
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define consumer sovereignty
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consumers decide what gets produced
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profit is the ________ ________ for businesses in a free market
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motivating factor
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are there any economic systems that rely exclusively on central planning or the individual initiative of the free market
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NO
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most contemporary mixed economies blend
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the market with government intervention
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3 bad things about centrally planned economies
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1. cumbersome 2. do not meet consumer needs 3. limit freedom
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define laissez faire
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the doctrine that government generally should NOT intervene in the marketplace
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some needs that markets could meet fall to government so that
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all members of society participate
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without laws insisting competition, firms could
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charge any price for goods
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define private property
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property tat is owned by individuals or companies
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government purchases land, labor, and capital from ________ in factor markets
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households
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government provides certain good and services through the factor resources that they combine
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greatest expenditure of the U.S. government is
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social security
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define free enterprise
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economic system characterized by private or corporate ownership of capital goods
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define continuum
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a range with no clear divisions. on one end is centrally planned economy, on the other side is free market
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define transition
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a period of change in which an economy moves away from central planning toward a market based system
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define privatized
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sold to individuals and then allowed to compete with another
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to make the transition, state firms must be
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privatized
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what kind of economy is hong kong and north Korea
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free market, centrally planned
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what kind of economy does U.S. have
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free enterprise economy
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Adam smith was one of the first people to offer explanation of
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how a market economy works
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adam smith wrote
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the wealth of nations
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the wealth of nations describes
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how a market system can flourish
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Smith identified land labor and capital as
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factors of production
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did Adam smith believe in Lassiez Faire
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YES
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the key actor to americas economic success is
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the free enterprise
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define free enterprise
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a social and political commitment to giving people the freedom and flexibility to try out their business ideas and compete in the marketplace
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property is a protected right under
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the 5th amendment of the bill of rights
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the _______ amendment has a _______ _____ _____ that protects property but on a ______ _________ level rather than federal
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14th, due process clause, state gov.
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do businesses have the right to property
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yes
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can government take property away
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yes, but only when there is a public reason and they must pay the owner of the property
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constitution also has rules of how government can tax
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also guarantees the right to make binding contracts
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can political processes excuse contracts
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no
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7 main characteristics of free enterprise
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1. profit motive 2. open opportunity 3. legal equality 4. private property rights 5. free contract 6. voluntary exchange 7. competition
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define profit motive
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the force that encourages people and organization to improve their material well being
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define open opportunity
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the concept that everyone can compete in the marketplace
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define legal equality
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giving everyone same equal rights
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define private property rights
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the concept that people have the right and privilege to control their possessions as they with
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define free contract
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allows people to decide what agreements they want to enter into
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define voluntary exchange
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allows people to decide what and when the want to buy and sell rather than forcing them to do so at certain times or prices
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define competition
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rivalry among sellers to attract customers while lowering costs
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legal equity maximizes a country’s use of
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its human capital
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competition provides customers with the choice of a larger variety of goods most of which at a reasonable price
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a fundamental purpose of the free enterprise system is to
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give customers the freedom to make their own economic choices
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what are 2 rolls of consumers
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making their desires known throughout their 1. economic dealings with producers or by 2. joining an interest group
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how do customers make their desires known
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thought they economic dealings with producers or by joining an interest group
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define interest group
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a private organization that tries to persuade public officials to act or vote according to the interest of the group’s members
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one of the gov. important roles in the free market is to
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inform consumers
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gov. claims protect consumers from
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dangerous products and fraudulent claims
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define public disclosure laws
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requires companies to give consumers important info about their products
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federal and state agencies regulate industries who’s goods and services affect
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the well being of the public
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how do federal and state agencies regulate industries who’s goods and serves affect the well being of the public
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by imposing restrictions
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businesses must follow certain environmental protection rules
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individuals and businesses are subject to zoning laws
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define zoning laws
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forbid homeowners from running businesses from home
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federal government and many states became actively involved in economic matter of ________ _______ to protect consumers
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public interest
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define public interest
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the concerns of the public as a while
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examples of public interest where government regulates
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manufacturing standars, require drugs be safe and effective, sanitary conditions where food is produces
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3 negative effects of government regulation
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1. rules are costly to implement, but into profits, slowing growth and raising prices 2. regulations lower competition, making prices of goods skyrocket 3. increased government spending in industries because the government has to hire workers to do the actually oversight
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define public good
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a shared good or service for which it would be inefficient or impractical 1. to make consumers pay individually and 2. to exclude non payers Ex. roads
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how does the government pay for public goods
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by collecting taxes
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any number of consumers can use a public good without
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reducing the benefits to any single consumer
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increasing number of consumers ________ increase the cost of producing a public good
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doesn’t
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cost is critical in deterring
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whether something gets produced as a public good
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when a good is public (2)
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1. the benefit to each individual is less than the cost that each would pay if it were provided privately 2. the total benefits to society are greater than the total cost
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public goods are financed by
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the public sector
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define public sector
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the part of the economy that involves the transactions of the government
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define private sector
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the part of the economy that involves transactions of individuals and businesses, would have little incentive to produce public goods
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a phenomenon associated with public goods is called
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the free rider problem
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define free rider
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someone who would not choose to pay for a certain good or service, but would get the benefits of it anyway if it were provided as a public good
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the free rider problem suggests that if the government stopped collecting taxes and relied on voluntary contributions…
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many public services would be eliminated
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free riders are examples of
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market failure
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define market failure
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a situation in which the market on its own does not distribute resources efficiently
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define externality
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an economic side effect of a good or service that generate benefits or costs to someone other than the person deciding how much to produce or consume
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externalities can be _______ or ______
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positive, negative
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some believe that private sector generates positive externalities more efficiently than
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public sector
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whether private or public, positive externalities cause
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part of the benefit of a good to be gained by someone who did not purchase it
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negative externalities cause
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part of the cost of producing a good or service to be paid for by someone other than the producer
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example of positive externality
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someone buys an old eyesore house in a neighborhood. They fix it up. the neighbors did not pay for it but they receive benefits from it such as higher property value and better view
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example of negative externality
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neighbor begins plying the accordion and hold Friday night polka parties in their backyard. unfortunately, you hate polka
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example of free rider problem
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i do not personally pay for military helmets, yet he the government provides a system of nation defense, i benefit whether i pay or not
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when externalities are present, we have a
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market failure because the cost or benefits of a good or service are not assigned properly
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government want to ________ positive externalities but ______ negative ones
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increase, eliminate
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define macroeconomics
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the study of the behavior and decision making of entire economies. this branch examines major trends for economy as a while
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define microeconomics
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the study of the economic behavior and decision making of small units such as individuals, facilities, households, and businesses
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define macro
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large
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define micro
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small
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what is one way economists measure economic well being
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by calculating the nations gross domestic product
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define gross domestic product (GDP)
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the total value of all final goods and services produced in an economy
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define business cycle
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a period of macroeconomic expansion followed by a period of contraction or decline
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economics follow a countries GDP and other key statistics to predict
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business cycles
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free enterprise systems are subject to business cycles because
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economic decisions about factors such as prices, production and consumption are made by individuals and businesses acting in self interest
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gov play a role in attempting to prevent _______ _______ in economic behavior
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wild swings
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because market is vulnerable to business cycles, gov creates…
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public policies that aim to stabilize the economy
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policy makers pursue 3 main outcomes as they seek to stabilize economy what are they
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1. high employment 2. steady growth 3. stable prices
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an indicator of economic stability is (2)
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1. general price levels 2. the health of the nations financial institutions
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who helps compensate for typical swings of the business cycle
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the gov
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define work ethic
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a commitment of the value of work and purposeful activity
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together work ethic and technology
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increase productivity
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define technology
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the process used to produce a good or service
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improvements in technology allow and economy to
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produce more output from the same or smaller input
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what is the engine of the free enterprise system
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inventions
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who funds research and development projects
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federal agencies
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what allow investor to make huge profits
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patents and copy write
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U.S. patent gives the inventor of a new product the exclusive right to
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produce and sell it for 20 years
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a copywriter grants an author excluding rights to
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publishing and selling
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who issues patent and copyrights
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congress
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where is congressional authority to issue patent and copyrights states
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article 1 section 8 of the constitution
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define poverty threshold
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an income level below that which is needed to support families or households
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free market is good at ______ ________ but is bad at …
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generating wealth, distributing the wealth evenly throughout society
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who determines the poverty threshold
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federal government. it is adjusted periodically
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why can economic opportunities be limited in poor cities
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because lack of jobs or education
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the gov provides a safety net for the poor, disabled, extremely young, extremely old, and very sick
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define welfare
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the term referring to government aid for the poor where taxes are collected and redistributed to the poor
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who developed welfare. when
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FDR during great depression
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welfare spending used under who and why
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lyndon b johnson because of his war on poverty
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what is bad about welfare
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income redistribution discourages productivity and aggravates poverty. it also doesn’t promote people to go out and find work
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income data is collected by who
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census bureau
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state and fid gov provide what to poor, disabled, or retired
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cash transfers
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define cash transfers
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direct payment of money to poor, disabled, or retired
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4 cash transfers
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1. temporary assistance for needy families (TANF) 2. social security 3. unemployment insurance 4. workers compensation
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define temporary assistance for needy families (TANF)
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replaced AFDC. it stopes direct federal welfare payments to recipients. instead the federal money goes to states which design and run their own welfare programs
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states must adhere to federal rules that _______ ______ ______ and establish a _____ _____ ___ ______
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create work incentives, lifetime limit for benefits
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TANF aims to
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move people from welfare dependence to the workforce
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define social security
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provides cash transfers of retirement income to the elderly and living expenses to disabled. the program collects payroll taxes from current workers and redistributes it to recipients
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who funds unemployment insurance
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both federal and state government
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define unemployment insurance
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provides money to eligible workers who have lost their jobs but recipients must show effort to get work each week of getting benefits
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define workers’ compensation
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provides money from state to workers injured on the job
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most employers must pay workers compensation insurance to cover any future claims the employees might make
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define in-kind benefits
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goods and services provided for free or at low prices by government (food stamps, legal aid etc.)
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who provides health insurance for the elderly, disabled, and poor
answer

us government
question

what covers people 65+ years of age as well as the disabled, and some poor people who are out of work or work without benefits
answer

medicare
question

who/what administers medicare and medicaid
answer

social security
question

who/ what provide educational opportunities to poor
answer

fed. state, and local gov
question

education adds to what two things
answer

human capital and labor productivity
question

who created faith based initiatives
answer

George W. Bush
question

define faith based initiatives
answer

an initiative to rely on non government support for people in need. It uses faith based organizations, charities, and community groups that have ability to save and change lives. faith based organizations can compete for federal funds. Bush believed organizations were most successful in delivering social services. they solve problems and provide special compassion. established an Office of Faith Based and Community Initiatives
question

5 roles of gov in U.S. economy
answer

1. protect private property rights 2. provide safety nets (welfare, social security, unemployment, etc.) 3. provide protection for consumers 4. make consumers aware of potentially dangerous or financially risky products 5. regulate economy
question

define value
answer

what someone is willing to give up for something that they want/need
question

U.S. is a ________ economy which allows producers and consumers to _________ for product and profits
answer

market, compete
question

the constitution sup[ports markets through (4)
answer

1. property rights as an incentive to innovate and own factors of production – free enterprise system 2. limited taxation 3. legal equality 4. free contracts
question

gov gets involves by (4)
answer

1. maintaining legal and social framework 2. stabilizing economy 3. providing public goods and services 4. providing safety net
question

why does the law of increasing cost occur
answer

because we use resources best suited for producing a product first, THEN use resources less suited for producing that product as we produce more of it
question

3 assumptions about production possibilities curves
answer

1. fixed amount of technology and resources 2. most efficient use of technology and resources 3. only 2 items produced

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