MICROECON CHAPTER 2
Creative destruction
The creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business.
Barter
swapping goods for goods
Medium of Exchange
Money is a medium of exchange
Freedom of Enterprise
ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.
Economic System
A particular set of institutional arrangements and coordinating mechanism
Invisible Hand
Competition controls or guides self-interest such that self-interest automatically and quite unintentionally furthers the best interest of society.
Consumer Sovereignty
Crucial in determining the types and quantities of goods produced.
Division of Labor
Human specialization
Command System
In that system, government owns most property resources and economic decision making occurs through a central economic plan. A central planning board appointed by the government makes nearly all the major decisions concerning the use of resources, the composition and distribution of output, and the organization of production.
Market
It is an institution or mechanism that brings buyers ("demanders") and sellers ("suppliers") into contact. A market sys- tem conveys the decisions made by buyers and sellers of products and resources. The decisions made on each side of the market determine a set of product and resource prices that guide resource owners, entrepreneurs, and consumers as they make and revise their choices and pursue their self-interest.
Money
It is simply a convenient social invention to facilitate exchanges of goods and services.
Self-Interest
It is the motivating force of the various economic units as they express their free choices. Self-interest simply means that each economic unit tries to achieve its own particular goal, which usually requires delivering something of value to others.
Circular Flow Diagram
Observe that in the diagram we group private decision makers into businesses and households and group markets into the resource market and the product market.
Specialization
Specialization is the use of resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.
Competition
The basis of this competition is freedom of choice exercised in pursuit of a monetary return.
Product Market
The place where goods and services produced by businesses are bought and sold.
Resource Market
The place where resources or the services of resource suppliers are bought and sold.
Market System
The system is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity. Participants act in their own self-interest. Individuals and businesses seek to achieve their economic goals through their own decisions regarding work, consumption, or production.
Private Property
This right of private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, use, and dispose of property resources as they see fit. The right of property owners to designate who will receive their property when they die helps sustain the institution of private property.
Dollar votes
Through "dollar votes", consumer register their wants in the market. If the dollar votes for a certain product are great enough to create a profit, businesses will produce that product and offer it for sale. In contrast, if the dollar votes do not create sufficient revenues to cover costs, businesses will not produce the product. So the consumers are sovereign.
Freedom of Choice
enables owners to employ or dispose of their property and money as they see fit. It also allows workers to try to enter any line of work for which they are qualified. Finally, it ensures that consumers are free to buy the goods and services that best satisfy their wants and that their budgets allow.
