Chapter 2 Economic Systems

Profit

A financial gain that a seller makes from a business transaction.

Laissez Faire

A french phrase meaning "leave things alone."

Circular Flow Model

A model developed by Economists to help answer how fundamental characteristics combine to allow a market economy to function. It visualizes how all interactions occur in a market economy.

Communism

A more extreme form of socialism in which there is no private ownership of property and little or no political freedom, also grew out of Carl Marx's thinking.

Specialization

A situation in which people concentrate their efforts in the areas in which they have an advantage.

Authoritarian

A system requiring absolute obedience to authority.

Voluntary Exchange

A trade in which both traders believe that what they are getting is worth more than what they are giving up.

Traditional Economy

An economic system in which families, clans, or tribes make economic decisions based on customs and beliefs that have been handed down from generation to generation.

Socialism

An economic system in which the government owns some or all of the factors of production.

Capitalism

An economic system that is based on private ownership of the factors of production.

Mixed Economy

An economy that has elements of traditional, command, and market systems - is the most common type of economic system.

Market

Any place or situation in which people buy and sell resources and goods and services.

Market Economy

Economic system based on individual choice, not government directives. In this system consumers and producers drive the economy.

Centrally Planned Economy

Leaders decide what should be produced and how it should be produced. They decide for whom products should be produced, in part by setting wages and who earns the highest wages and who the lowest. These leaders decide who has money to buy products. All economic decisions are made by members of the central government.

Global Economy

Refers to all the economic interactions that cross international boundaries.

Invisible Hand

Term economists use to describe the self-regulating nature of the marketplace. Originally coined by Adam Smith in his 1776 book "The Wealth of Nations."

Competition

The effort of two or more people, acting independently, to get the business of others by offering the best deal.

Command Economy

The government decides what goods and services will be produced, how they will be produced, and how they will be distributed.

Consumer Sovereignty

The idea that because consumers are free to purchase what they want and to refuse products they do not want, they have the ultimate control over what is produces.

Factor Market

The market for the factors of production - land, labor, capital, & entrepreneurship.

Product Market

The market where goods and services are bought and sold.

Private Property Rights

The rights of individuals and groups to own businesses and resources.

Economic System

The way a society uses resources to satisfy its people's wants.

Privatize

To change from government or public ownership to private ownership.

Nationalize

To change from private ownership to government or public ownership.