Econ Chapter 2

specialize in tasks that take advantage of their individual abilities and skills.

"Division of labor" means that workers

the goods and services that money can buy.

Consider the statement: "We want money only to part with it." When people express a desire to 'have money,' they really want

the opportunity to gain profit

In market economies, the incentive that draws entrepreneurs into industry is

consumers, through their dollar votes, determine how resources are distributed and what goods and services are produced to meet their wants

In the free market system, consumer sovereignty occurs because

Wages, rents, interest, profits

In the resource market, income flows to households through:

supporting the development of new technology

Market systems promote economic growth and higher standards of living by

Freedom of Enterprise

The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those prudcts in markets of their choice

Freedom of Choice

The freedom of resource owners to dispose of their resources as they think best; of workers to enter any line of work for which they are qualified; and of consumers to spend their incomes in whatever way they feel is most appropriate

Command System

A type of economic system in which government owns most property resources and economic decision making is set by a central economic plan created and enforced by the government. Also known as "socialism" and "communism".

Creative Destruction

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

provide an incentive to maintain property and allow for the orderly transfer of property ownership.

The market system depends on private property ownership and the protection of private property rights to

Households

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

Mutually Agreeable

Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off

"laissez-faire"

French for "let it be", this term means to keep the government from interferring with the economy.

-What will be produced? -How will goods be produced? -How will goods be distributed to consumers?

Fundamental economic questions that every society must answer include

"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.

command economies

Economic planning by central government agencies is primarily associated with

Resource Market

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

Corporation

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

Produce 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. This has to determine what goods are produced, how they are produced, who gets them, how to accomodate change, and how to promote technological progress.

Market System

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 these resources; capitalism.

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

An institution that brings buyers and sellers together

Sole proprietorship

An unincorporated firm owned and operated by one person.

Partnership

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

find a person who has what you want and a person who needs what you have to offer.

Barter requires that you

-Entreprenuership -Investment -Intellectual property

Private property rights are critically important for the development of

as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost.

Self-interest helps achieve society's economic goals because

self-interest

The "invisible hand" that directs the decision-making of firms and households in a market economy is called

market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce.

The phrase "invisible hand" means that

Competition

The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the market as they see fit

Private Property

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

government alone

In a command economic system, the answers to the fundamental economic questions are determined by

a government-appointed planning board based on the board's long-term priorities.

In a command economy, scarce goods are allocated by

protect private property rights

In a laissez-faire economy, the primary role of government in the economy is to

market prices that are determined by consumers and producers acting in their own self-interest.

In a market system, scarce goods are allocated through the operation of

firms, consumers, and the government

In a mixed economy, the economic decisions of what to produce, how to produce, and who will receive products are made by

households sell and businesses buy land, labor, and capital in the resource market

In the circular flow model,

Laissez-faire Captialism

In this type of economic system, the government's role would be limited to protecting private property from theft and agression and establishing a legal environment in which contracts would be enforced and people could interact in markets to buy and sell goods, services, and resources. Also known as "pure capitalism"/

-Creating optimal use of human resources by taking advantage of the different skills of each individual in the workforce -Taking advantage of skill development as each worker becomes more efficient in performing the same task

Specialization of labor contributes to increased economic output by

Consumer Sovereignty

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

improves efficiency, increases output, and provides for growth.

The use of capital in the production process

provides a common value that makes buying and selling transactions simpler than would be the case with barter.

The use of money

-Facilitates trade -Establishes a medium of exchange

The use of money facilitates specialization because money

Specialization

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

individual wants are diverse.

There is a wide variety of desired goods and services in a market system because

A market economy

This type of economic system communicates changes in consumer tastes through price and profit signals

-Economic efficiency -Individual freedom of choice -Incentives generate innovations

Unlike the command economic system, the merits of the market system are

Self-Interest

What each individual believes or firm believes is best for itself and seeks to obtain

consumers because if the goods offered are not what consumers want, consumers will not buy them.

What is produced is ultimately determined by

trade enables individuals to obtain the goods in which they do not have a specialization.

When an economy relies on specialization,

money

While resources and products flow in one direction of the circular flow model, _________ flows in the other direction.