Econ Chapter 2

economic system

the structure of methods and principles that a society uses to produce and distribute these goods and services

factor payments

the income people receive in return for supplying factors of production

profit

the amount of money a business receives in excess of its expenses

safety net

a set of government programs that protect people who face unfavorable economic conditions

standard of living

level of economic prosperity

innovation

the process of bringing new methods, products, or ideas into use

traditional economy

oldest and simplest economic system that relies on habit, custom, or ritual to decide the 3 basic economic quesetions

market

any arrangement that allows buyers and sellers to exchange things

specialization

the concentration of the productive efforts of individuals and businesses on a limited number of activities

free market economy

an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets

household

a person or group of people living in a single residence

firm

an organization that uses resources to produce a product or service, which it then sells

factor market

the arena of exchange in which firms purchase the factors of production from households

product market

the arena of exchange in which households purchase goods and services from firms

Adam Smith (1723-1790)

first modern economist, book The Wealth of Nations is about how free markets function and regulate. Published works on moral philosophy, and economic indeas have influenced many countries around the world including the U.S. (observed that an economy is made up of countless individual transactions)

self interest

an individuals own personal gain

incentive

the hope of reward of fear of penalty that encourages a person to behave in a certain way

competition

the struggle among producers for the dollars of consumers

consumer sovereignty

the power of consumers to decide what gets produced

centrally planned economy

an economic system in which the government makes all decisions on the three key economic quesitons

command economy

another name for a centrally planned economy

socialism

a range of economic and political systems based on the belief that wealth should be distributed evenly throughout a society

communism

a political system in which the government owns and controls all resources and means of productions and makes all economic decisions

authoritarian

describes a form of government that limits individual freedoms and requires strict obedience from its citizens

laissez faire

the doctrine that government generally should not interfere in the marketplace

private property

property that is owned by individuals or companies, not by the government or the people as a whole

intellectual property

creations, such as books, songs, or symbols that consist of ideas rather than physical objects

mixed economy

economic system that has some market based elements and some level of government involvement

economic transtition

a period of change in which a nation moves from one economic system to another

privatization

the process of selling businesses or services operated by the government to individual investors, and then allowing them to compete in the marketplace

profit motive

the incentive that drives individuals and business wonders to improve their material well being

open opportunity

the principle that anyone can compete in the marketplace

legal equality

the principle that every has the same legal rights

private property rights

the principle that people have the right to control their possessions and use them as they wish

free contract

the principle that people may decide what agreements they want to enter into

voluntary exchange

the principle that many people may decide what, when, and how they want to buy and sell

interest group

a private organization that tries to persuade public officials to act in ways that benefit its members

patriotism

love of ones country

eminent domain

the right of a government to take private property for public use

public interest

the concerns of society as a whole

public disclosure laws

laws requiring companies to provide information to consumers about their products and services

macroeconomics

the study of economic bahavior and decision making in a nations whole economy

microeconomics

they study of economic behavior and decision making in small units, such as households and firms

gross domestic product (GDP)

the total value of all final goods and services produced in a country in a given year

business cycle

a period of macroeconomic expansion, or growth, followed by a period of contraction, or decline

referendum

a proposed law submitted directly to the public

obsolescence

situation in which older products and processes become out of date

patent

a government license that givers the inventor of a new product the exclusive right to produce and sell it

copyright

a government license that grants an author exclusive rights to publish and sell creative works

work ethic

a commitment to the value of work

public good

a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who did not pay

public sector

the part of the economy that involves the transactions of the government

private sector

the part of the economy that involves the transactions of individuals and businesses

infrastructure

the basic facilities that are necessary for a society to function and grow

free rider

someone who would not be willing to pay for a certain good or service but who would get the benefits of it anyway if it were provided as a public good

market failure

a situation in which the free marker, operating on its own, does not distribute resources efficiently

externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

poverty threshold

an income level below that which is needed to support families or households

welfare

government aid to the poor