AP Macro Economics: Ch. 2 Vocab: The Market System and the Circular Flow

Identify type of economic resources and types of income associated with various factors. (in order of size)

1. Human Resources-Labor: the income is wages 2. Entrepreneurial Ability: profit and loss; income 3. Capital-manufactured good used in production of other goods: interest income 4. Land-nature: rental income

Resource Market

A market in which households sell and firms buy resources or the services of resources

Product Market

A market in which products are sold by firms and bought by households.

Command System

A method of organizing an economy in which property resources are publicly owned and government uses central economic activities, command economy; communism.

Economic System

A particular set of institutional arrangements & coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.

Market System

All the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate the economy's scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers.

Explain the concepts of allocative and productive efficiency and how they differ.

Allocative efficiency-production of a mix of goods and services that is most wanted by society and the optimal point of production. Productive Efficiency-production of any particular mix of goods and services in the least costly way

Circular Flow Diagram

An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

Market

Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.

Medium of Exchange

Any item sellers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.

Money

Any item that is generally acceptable to sellers in exchange for goods and services.

Consumer Sovereignty

Determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers' direction of production through their dollar votes.

Barter

Exchange of one good or service for another good or service.

Freedom of Enterprise

Freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their own choice.

Highlight the main features of a market economy and a command economy.

Market economy- decision regarding investment and production and decided by supply and demand Command economy- decisions regarding production and investment are embodied in a plan formulated by government officials.

Self-interest

That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.

Dollar Votes

The "votes" that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets.

Define economic growth and what three things cause it.

The ability to produce a large total output caused by 1. increase in resources or quality 2. technology advances 3. specialization and trade

Define the economizing problem, incorporating the relationship between limited resources and unlimited wants.

The economy is based on the wants of the people which are unlimited, but there are limited resources to fill the wants, which, within itself, is unattainable.

Freedom of Choice

The freedom of owners of property resource to employ or dispose of them as they see fir, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.

Creative Destruction

The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies.

Competition

The presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market.

Private Property

The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.

Division of Labor

The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.

"Invisible Hand"

The tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interest of society.

Specialization

The use of the resources of an individual, a firm, a region, or a nation to concentrate production in one or a small numbers of goods and services.

Differentiate between full employment and full production.

full employment-use of all available resources full production-all employed resources should be used so that they provide the maximum possible satisfaction of our material wants They differ in that full production involves the idea of idle resources because not all available resources are being used, only the ones that fill the consumer needs.