Economic Institutions and Government Roles Flashcards

Vocabulary flashcards covering key terms and definitions regarding economic institutions, business structures, market systems, and government roles.

Institutions

The formal and informal rules that constrain human behavior.

Market economy

An economic system based on private property and the market in which, in principle, individuals decide how, what, and for whom to produce.

Private property rights

The control a private individual or firm has over an asset.

Socialism

An economic system based on individuals' goodwill toward others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce.

Capitalism

An economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists.

Business

Private producing units in society that decide what to produce, how much to produce, and for whom to produce it.

Entrepreneurship

The ability to organize and get something done, as well as labor services that involve high degrees of organizational skills, concern, oversight responsibility, and creativity.

Consumer sovereignty

The principle that the consumer's wishes determine what's produced.

Profit

What's left over from total revenues after all the appropriate costs have been subtracted ($\text{Total revenue} - \text{Total cost}$), functioning as a return on entrepreneurial activity and risk taking.

Sole proprietorships

Businesses that only have one owner, which are the easiest to start and have the fewest bureaucratic hassles.

Partnerships

Businesses with two or more owners that create possibilities for sharing the burden, but also create unlimited liability for each of the partners.

Corporations

Businesses that are treated as a person, legally owned by their stockholders, who are not liable for the actions of the corporate 'person'.

Households

Groups of individuals living together and making joint decisions, representing the most powerful economic institution.

Demerit goods or activities

A good or activity that government believes is bad for people even though they choose to use the good or engage in the activity.

Merit goods or activities

A good or activity that government believes is good for you, even though you may not choose to consume the good or engage in the activity.

Market Failure

A situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes.

Externality

An effect of a decision on a third party not taken into account by the decision maker.

Macroeconomic externalities

Externalities that affect the levels of unemployment, inflation, or growth in the economy as a whole.

Public goods

Goods that must be supplied to all and whose consumption by one individual does not prevent its consumption by another individual.

Private good

A good that cannot be consumed by another individual once consumed.

Government Failure

A situation in which government intervention in the market to improve market failure actually makes the situation worse.

Global corporations

Corporations with significant operations in more than one country.