Economic Systems: Capitalism vs Socialism

Vocabulary-style flashcards covering key concepts from the Economic Systems: Capitalism vs Socialism lecture notes.

Economic System

The rules and methods a society uses to decide what goods are produced, how they are produced, and for whom they are produced; the mechanism by which an economy answers the three fundamental economic questions.

Three Fundamental Economic Questions

The core questions of what to produce, how to produce, and for whom to produce; answered by an economy’s system.

Comparative Economic Systems

The subfield of economics that compares and contrasts the structure and performance of different economic systems.

Four Primary Institutions

Households, firms, markets, and government—the main components present in almost all economic systems.

Households

The most fundamental part of an economic system; ultimate consumers and primary suppliers of factors of production; rational decision makers.

Firms

Institutions that transform factors of production into finished goods and services.

Natural Assets

Natural resources (minerals, fossil fuels, water, land, forests) used as factors of production.

Produced Assets

Machines, factories, inventories, and infrastructure that comprise industrial capital.

Human Capital

The skills, education, and training of individuals in the labor force.

Factors of Production

Scarce resources used to produce goods/services, including natural assets, produced assets, and human capital.

Markets

The collection of buyers and sellers where interaction between households and firms occurs; not a decision-maker.

Government

The decision-making institution with the power to impose restrictions, enforce contracts, define property rights, provide goods/services, and redistribute income.

Property Rights

The bundle of rights that allow individuals to use, transfer, and be compensated for their property.

Right to Control

The right to decide how to use one’s property.

Right to Transfer

The right to obtain ownership of property from or relinquish ownership to another person.

Right to Restitution

The right to be compensated when property or rights are damaged.

Contract

A legal document specifying duties of parties and providing enforcement or compensation for non-performance.

Capitalism

An economic system in which the means of production are privately owned and operated for profit; owners decide how to use resources and keep the surplus.

Socialism

An economic system in which the means of production are owned by the government, which allocates productive resources.

Communism

An economic system with collective ownership of the means of production, a stateless and classless society; “from each according to ability, to each according to need.”

Feudalism

A precursor to capitalism where land ownership is restricted to an aristocratic nobility and society is divided between nobles and peasants.

Invisible Hand

Adam Smith’s idea that self-interested behavior in free markets can lead to outcomes that are efficient for society.

New Soviet Man

A theoretically benevolent citizen; contrasted with Economic Man in debates over socialist economies.

Economic Man (Homo Economicus

A theoretical agent who is self-interested and rational in economic decisions.

Consumer Sovereignty

The freedom for individuals to choose to purchase or not purchase a good or service in a free market.

Mixed Economy

An economy with both private and government ownership/influence; some resources allocated by individuals, others by the state.

Planning versus Markets

Planning involves government-determined economic decisions; markets rely on self-interested individuals to determine outcomes.

Command Planning

Government directly controls nearly all economic activity and state-owned enterprises predominate.

Indicative Planning

Government guides economic decisions through policies and incentives rather than direct control.

Material Rewards

Monetary or consumption-based incentives used to influence behavior.

Moral Suasion

Persuasion aimed at encouraging people to behave in a “right” way.

Coercion

Use of force or intimidation to obtain compliance.

Economic Freedom of the World (EFWI)

A ranking measuring economic freedom across dimensions like personal choice, open markets, and defined property rights.

International Property Rights Index (IPRI)

An index measuring private property rights protection across countries in three dimensions: legal/political environment, physical property rights, and intellectual property rights.

Regulatory Environment (Ease of Doing Business, DBS)

World Bank measure of the costs and time to comply with regulations; used to compare how easy it is to conduct business across countries.