AP Macroeconomics, Chp. 2: The Market System and the Circular Flow

Market System

(1) An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism. Compare with command system. (2) All the product and resource markets of a market economy and the relationships among them.

Laissez-faire Capitalism

A hypothetical economic system in which the government's economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets in which only mutually agreeable transactions would take place between buyers and sellers; sometimes referred to as "pure capitalism."

Corporation

A legal entity ("person") chartered by a state or the federal government that is distinct and separate from the individuals who own it.

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 planning to direct and coordinate economic activities; socialism; communism. Compare with market system.

Economic System

A particular set of institutional arrangements and a 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.

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.

Sole Propreitorship

An unincorporated firm owned and operated by one person.

Partnership

An unincorporated firm owned and operated by two or more persons.

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 accept and buyers 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.

Businesses

Economic entities (firms) that purchase resources and provide goods and services to the economy.

Households

Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.

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 cast for the production of preferred products when they purchase those products rather than the alternatives that were also available.

Consumer Sovereignty

The 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

The direct exchange of one good or service for another good or service.

Competition

The effort and striving between two or more independent rivals to secure the business of one or more third parties by offering the best possible terms.

Freedom of Enterprise

The 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 choice.

Freedom of Choice

The freedom of owners of property resources to employ or dispose of them as they see fit, 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 destroys the market power of existing monopolies.

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 competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.

Specialization

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