Economics Test #2
As a result of scarce resources, societies must answer three key economic questions:
- What goods and services should be produced? - How should these goods and services be produced? - Who consumes these goods and services?
What are the characteristics of a centrally planned economy?
A centrally planned economy is characterized by: Government answering the three economic questions Government ownership of land, labor, and capital Opposition to private property, free market pricing, competition, and consumer choice
What are the characteristics of a free market economy?
A free market economy is characterized by: - Households and firms - Factor and product markets - Self-interest - Competition - Economic freedom, efficiency, and equity
What are the characteristics of a mixed economy?
A market-based economy with some government intervention. Government helps societies meet needs that would be too difficult for them to meet under a totally free market economy, such as education. Government protects property rights and ensures that exchanges in the marketplace are fair
what values affect how a society answers the key economic questions?
A society's values, such as freedom or tradition, guide the type of economic system that society will have.
How should goods and services be produced?
As a society decides how to produce its goods and services, it must consider how best to use its land, labor, and capital.
what do command economies oppose?
Command economies oppose:Private property,Free market pricing, Competition, Consumer choice
What beliefs did Karl Marx hold about capitalism?
Communism derived from the writings of Karl Marx who believed that labor was the source of all value but that under capitalism, all the profit created by laborers ended up in the hands of the property owners.
What goals affect how a society answers the key economic questions?
Each society is guided by its economic system, which affects the way in which it does business within the society itself and with other societies.
What goods and services should be produced?
Each society must decide what to produce in order to satisfy the needs and wants of its people. Because resources are limited, each decision that a society makes about what to produce comes at an opportunity cost.
Why is competition important to the free market?
Firms seek to make higher profits by increasing sales. Because of competition among other firms, however, increasing sales is not always possible.Self-interest and competition work together to regulate the marketplace. Smith called this self-regulating mechanism of the market "the invisible hand."
Who makes key decisions in a centrally planned economy?
In a centrally planned economy (also known as a command economy), the government, rather than individual producers and consumers, answer the key economic questions.The government owns both land and capital.The government also controls where people work and what they are paid.
what kind of role does innovation play in the economy?
Innovation plays a huge role in economic success as well as when a nation strives to improve its standards of living.
The American government intervenes in the economy by:
Keeping order, Providing vital services, Promoting general welfare
Why do markets exist?
Markets, like a farmer's market, a sporting goods store, and the New York Stock Exchange, eliminate the need for any one person to be self-sufficient.Markets allow us to exchange the things we have for the things we want.
what does specialization allows for businesses?
Specialization allows businesses to focus on a limited number of related products or services.
what does specialization leads to in the economy?
Specialization leads to efficient use of land, labor, and capital. Because of specialization, markets are needed to give people an arena with which to sell their products and to buy products that they don't produce themselves but need
What is one reason the government plays a role in the economy?
The government:Provides national defense and public education, Protects private property, Ensures fair exchanges in the marketplace
Federal and state laws protect private property.
The marketplace operates with a limited degree of government regulation.
Under ideal conditions, do free market economies meet the following economic goals:
They respond to rapidly changing conditions.They have a large degree of economic freedom.They encourage economic growth.They lend themselves to consumer sovereignty.
Who consumes goods and services?
This question is largely determined by how societies distribute income.Through factor payments, including profits, societies can determine who will be the consumers of the goods and services produced.
where are traditional economies usually found?
Traditional economies are usually found in communities that tend to stay small and close.Often members of these societies work to support the entire community, rather than just themselves or their immediate families.
mixed economy:
a market-based economic system in which the government is involved to some extent
economic transition:
a period of change in which a nation moves from one economic system to another
household:
a person or group living in a single residence
communism:
a political system in which the government owns and controls all resources and means of production and makes all economic decisions
socialism:
a range of economic and political systems based on the belief that wealth should be distributed evenly throughout society
safety net:
a set of government programs that protect people who face unfavorable economic conditions
invisible hand:
a term coined by Adam Smith to describe the self-regulating nature of the marketplace
free market economy:
an economic system in which decisions on the three key economic questions are based on the voluntary exchange in markets
free enterprise system:
an economic system in which investments in firms are made in a free market by private decision rather than by state control
centrally planned economy:
an economic system in which the government makes all decisions on the three key economic questions
traditional economy:
an economic system that relies on habit, custom, or ritual to decide the three key economic questions
self-interest:
an individual's own personal gain
firm:
an organization that uses resources to produce a product or service, which it then sells
command economy:
another name for a centrally planned economy
market:
any arrangement that allows buyers and sellers to exchange things
authoritarian:
describing a form of government which limits individual freedoms and requires strict obedience from their citizens
standard of living:
level of economic prosperity
private property:
property that is owned by individuals or companies, not by the government or people as a whole
what nations coexist with free market practices?
some nations, like Sweden, socialism coexists with free market practices.
profit:
the amount of money a business receives in excess of expenses
factor market:
the arena of exchange in which firms purchase the factors of production from households
product market:
the arena of exchange in which households purchase goods and services from firms
specialization:
the concentration of the productive efforts of individuals and businesses on a limited number of activities
laissez faire:
the doctrine that government generally should not intervene in the marketplace
incentive:
the hope of reward or fear of penalty that encourages a person to behave a certain way
factor payment:
the income people receive in return for supplying factors of production
consumer sovereignty:
the powers of consumers to decide what gets produced
innovation:
the process of bringing new methods, products, or ideas into use
privatization:
the process of selling businesses or services operated by the government to individual investors, and then allowing them to compete in the marketplace
economic system:
the structure of methods and principles that a society uses to produce and distribute goods and services
competition:
the struggle among producers for the dollars of consumers