Chapter 2 Terms The Market System and the Circular Flow

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; command economy; communism.

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.

Private property

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

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.

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.

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.

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 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.

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

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

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 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.

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 interests of society.

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.