Chapter 2 - The Market System and the Circular Flow

These flashcards cover key concepts from the lecture on the market system and the circular flow model, focusing on definitions, principles, and the functioning of various economic systems.

What is laissez-faire capitalism?

A system where the government does not interfere with the economy.

What is the command system?

An economic system known as socialism or communism, characterized by government ownership of resources and decisions made by a central planning board.

What defines the market system?

A mix of decentralized decision-making with some government control, where private markets are the dominant force.

What is self-interest in the market system?

Self-interest gives direction and consistency to economic activities.

What does competition do in the market system?

Competition among buyers and sellers diffuses economic power and fosters efficiency.

What is meant by 'consumer sovereignty'?

Consumer sovereignty determines what goods and services are produced based on consumer preferences.

How does the market system accommodate change?

By responding to changes in consumer tastes, technology, and resource prices.

What are the five fundamental questions of an economic system?

1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will get the goods and services? 4. How will the system accommodate change? 5. How will the system promote progress?

What is the role of money in trade?

Money acts as a medium of exchange, facilitating trade and reducing the need for barter.

What is the index of economic freedom?

A measure that ranks nations based on ten broad categories of economic freedom.

What is the circular flow model?

A model that illustrates how households and businesses interact in the factor and product markets.

What do households do in the circular flow model?

Households sell resources in the factor market and buy goods and services in the product market.

What do businesses do in the circular flow model?

Businesses buy factors of production and sell goods and services.

What is the significance of the 'invisible hand'?

The idea that individuals and firms promoting their own interests can unintentionally benefit society.

What are the characteristics of the market system?

Private property, freedom of enterprise, freedom of choice, self-interest, and competition.

How does the government fit into the market system?

The government plays an active but limited role to address market failures and ensure economic stability.

What motivates entrepreneurs to accumulate capital goods?

Entrepreneurs seek higher profit in the future by investing in capital goods based on consumer demand.