macroeconomics - chapter 2 vocab

economic system

determines what goods are produced, how they are produced, who gets them, how to accommodate change, and how to promote technological progress.

laissez-faire capitalism

French for “let it be” - an economic system of capitalism where government intervention is minimal and markets/prices direct nearly all economic activity

command system

an economic system where governments have total control over all economic activity

market system

prices are determined by the interaction of supply and demand, where individuals and businesses make economic decisions based on their own self-interest, leading to competition among producers and ultimately influencing the quantity and quality of goods and services offered. 

market

places where buyers and sellers come together to buy and sell goods, services, and resources.

private property

The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property

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.

freedom of choice

allows 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.

self-interest

the motivating force in the market system. it means that each economic unit (person, company, etc.) tries to achieve its own particular goal (maximizing profit, minimizing loss, etc)

competition

the rivalry between businesses to attract customers, secure resources, and gain market share through strategies like offering better products, lower prices, or innovative services

specialization

being really good at producing one or a few specific goods or services rather than the entire range of desired goods and services.

division of labor

when a complex job is broken down into many smaller, specialized tasks, with each task performed by a different person or group of people

medium of exchange

the medium of how goods are exchanged between two individuals or companies (ex: money, barter, etc.)

barter

swapping goods for goods

money

a method of payment for goods/services, usually paper and/or coins. Money is socially defined; whatever society accepts as a medium of exchange is money.

consumer sovereignty

the situation in an economy where the desires and needs of consumers control the output of producers.

dollar votes

In economics, "dollar votes" is an analogy that describes how consumers use their spending to influence producers' decisions in the marketplace. By choosing to buy certain goods and services, consumers "vote" for those products, signaling to companies that there is demand for them.

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.

(Example: Compact discs demolished vinyl records in the 1980s, while online streaming displaced compact discs in the 2000s.)

invisible hand

the concept that producers will be guided, as if by an "invisible hand", to produce what the public wants

(example: If consumers want more smartphones, their demand will drive up the price. Seeing this opportunity for profit, smartphone manufacturers will allocate more resources to producing them, leading to increased supply. This process happens without a central authority dictating production, showcasing the market's ability to efficiently direct resources to meet consumer needs.)

coordination problem

The chronic failure of command economies to harmonize the economic activities of producers so as to efficiently satisfy consumer demands; caused by command economies eschewing economic coordination via markets, prices, and profits in favor of central planning.

incentive problem

The chronic failure of command economies to harmonize the economic activities of producers so as to efficiently satisfy consumer demands; caused by command economies eschewing economic coordination via markets, prices, and profits in favor of central planning.

circular flow diagram

An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.

households

Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.

businesses

Businesses sell goods and services in the product market in order to obtain revenue, and they incur costs in the resource market when they purchase the labor, land, capital, and entrepreneurial ability that they need to produce their goods and services.

product market

in which households purchase the goods and services produced by businesses.

resource market

in which households sell resources to businesses. The households sell resources to generate income, and the businesses buy resources to produce goods and services.

residual claimant

the owners are the legal recipients (claimants) of whatever profit or loss remains (is residual) after all other parties have been paid.