U.S. Economics Chapter 2

Centrally Planned Economy-

In a Centrally Planned Economy the central government makes all decisions about the production and consumption of goods and services.

Centrally Planned Economy-

In a Centrally Planned Economy, the government owns both land and capital. The government decides what to produce, how much to produce, and how much to charge.

The Free Market Economy-

In a Free Market Economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services.

Market Economy-

In a Market Economy economic decisions are made by individuals and are based on exchange, or trade.

Mixed Economies-

Mixed Economies are systems that combine tradition and the free market with limited government intervention.

Market-

A Market is an arrangement that allows buyers and sellers to exchange goods and services.

Economic Efficiency-

As a self-regulating system, a Free Market Economy is efficient.

Economic Growth-

Because Competition encourages innovation, free markets encourage growth.

Problems of a Centrally Planned Economy-

Centrally Planned Economies face problems of poor-quality goods, shortages, and diminishing production.

Soviet Consumers-

Consumer goods in the Soviet Union were scarce and usually of poor quality.

Economic Freedom-

Free Market Economies have the highest degree of Economic Freedom of any economic system.

Additional Goals-

Free markets offer a wider variety of goods and services than any other economic system.

Self-Interest-

In every transaction, the buyer and seller consider only their Self-Interest, or their own personal gain. Self-Interest is the motivating force in the free market.

Soviet Agriculture-

In the Soviet Union, the government created large state-owned farms and collectives for most of the country's agricultural production.

Competition-

Producers in a free market struggle for the dollars of consumers. This is known as Competition, and is the regulating force of the free market.

Soviet Industry-

Soviet planners favored heavy-industry production (such as steel and machinery), over the production of consumer goods.

Invisible Hand-

The interaction of buyers and sellers, motivated by Self-Interest and regulated by Competition, all happens without a central plan. This phenomenon is called "the Invisible Hand of the marketplace."

Traditional Economies-

Traditional Economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.

Communism-

is a political system characterized by a Centrally Planned Economy with all economic and political power resting in the hands of the government.

Socialism-

is a social and political philosophy based on the belief that democratic means should be use to distribute wealth evenly throughout a society.

Specialization-

is the concentration of the productive efforts of individuals and firms on a limited number of activities.