Chapter 3 Economic Terms | Mr. Sarria

Chp 3 page 39

Economic system

Def: A society's way of coordinating the production and consumption of goods and services; it answers what, how, and for whom to produce.

Sentence: The Maasai herding cattle by custom and the US with its shopping malls are two very different economic systems.

Connections: Three main types: Traditional, Command, Market; most nations use a Mixed system; each emphasizes different economic goals.

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Traditional economy

Def: An economic system in which decisions about production and consumption are based on custom and tradition.

Sentence: In a Khoi-San community, the meat from a hunt is divided by long-standing social rules rather than by prices.

Connections: Oldest economic system; goal is economic stability and security; shrinking today; contrast with Command and Market economies.

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Command economy

Def: An economic system in which decisions about what, how, and for whom to produce are made by a powerful ruler or government.

Sentence: Egyptian pharaohs forcing thousands of workers to build the pyramids and the Soviet Union planning all prices and output are both examples of a command economy.

Connections: Related to Economic Planning and Authoritarian Socialism/Communism; Soviet Union is the example; contrast with Market Economy; typically weak on freedom and efficiency.

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Market economy / Free-market economy

Def: An economic system in which economic decisions are left up to individual producers and consumers, who trade in markets with little government planning.

Sentence: In a market economy (free-market economy), a baker decides what bread to bake and what price to charge, and customers decide whether to buy it.

Connections: Guided by self-interest and Adam Smith's "invisible hand"; highest goals are economic freedom and efficiency; coordinates through the Price System and Competition; related to the Circular Flow Model.

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Mixed economy

Def: An economic system in which both the government and individuals play important roles in production and consumption.

Sentence: The US is a mixed economy because it lets private firms sell most goods but also has government-run public schools, highways, and safety regulations.

Connections: Most modern economies are mixed; they fall between Command and Market extremes; the "mix" is measured on the Index of Economic Freedom; Transfer Payments and Public Works are government roles.

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Capitalism

Def: An economic and political philosophy in which property and businesses are owned by private individuals, and capital is used to make profit.

Sentence: An investor who buys a factory and hires workers in hopes of earning profit is practicing capitalism.

Connections: Grew from the Industrial Revolution; synonymous with the free market system; Marx criticized it; related to Capitalists and Profit Motive.

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Laissez-faire

Def: A French term meaning "let them do" that describes a market economy relatively free of government intervention.

Sentence: A laissez-faire approach would have the government let businesses set their own prices and wages with no regulation.

Connections: Economists use it to describe a pure market economy; the US is NOT truly laissez-faire because of Limited Government regulation (e.g., child labor and alcohol laws); related to Economic Freedom.

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Contract

Def: An agreement between a buyer and a seller that is legally binding.

Sentence: When you sign up for a cell phone plan, you enter a contract that both you and the company must honor.

Connections: A Key Characteristic of the US Free Enterprise System (Binding Contracts); enforced by courts; supports Property Rights and trust in markets.

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Capitalists

Def: Wealthy investors who accumulated capital (machinery, factories, railroads) and owned the means of production during the Industrial Revolution.

Sentence: 19th-century capitalists might own a textile mill and employ hundreds of workers.

Connections: Criticized by Karl Marx for exploiting workers; related to Capitalism and Industrial Revolution; Marx predicted workers would overthrow them.

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Karl Marx / The Communist Manifesto

Def: Karl Marx was an economist and philosopher who, with Friedrich Engels, wrote The Communist Manifesto (1848), calling for workers to overthrow capitalism.

Sentence: Marx argued that workers everywhere should revolt against capitalists and create a classless society in his The Communist Manifesto

Connections: Foundation of Socialism and Communism; slogan: "From each according to his ability, to each according to his needs"; inspired Lenin and the Soviet Union's Command Economy.

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Socialism

Def: A political and economic philosophy that calls for property to be owned by society as a whole rather than by individuals, for the equal benefit of all.

Sentence: Under socialism, factories and mills would be owned by the community and profits shared among all members.

Connections: Alternative to Capitalism; Marx saw it as a step toward Communism; branches include Authoritarian Socialism and Democratic Socialism.

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Authoritarian Socialism / Communism

Def: An economic system in which the government owns or controls nearly all factors of production; usually has a one-party totalitarian government, and the economy is planned by an economic agency.

Sentence: Under authoritarian socialism, or communism, the Soviet state owned the factories and farms and a central government decided what to produce.

Connections: Also called Communism; a type of Command Economy; Marx's final stage where property is owned by all; related to Economic Planning; examples: USSR, North Korea.

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Democratic Socialism

Def: An economic system in which some means of producing and distributing goods (such as electricity and railroads) are owned or controlled by an elected government, which directly controls production in those state-owned facilities.

Sentence: A country where the elected government runs the railroads and power plants but private businesses still sell most other goods abides by the democratic socialism system.

Connections: Type of Mixed Economy; contrast with Authoritarian Socialism (here citizens vote); leaders are elected; related to Public Works and high taxes for public services.

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Economic planning

Def: Government decision-making about production in which central committees of economists, officials, and experts decide what, how much, and for whom to produce.

Sentence: Through economic planning, Soviet planning committees set prices and output quotas for millions of products.

Connections: Feature of Command Economies and Authoritarian Socialism; led to shortages, waste, and poor quality (Soviet Union); contrast with Market decisions made by prices.

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Public works

Def: Government-financed projects such as dams, highways, and sewer systems that markets do not provide enough of.

Sentence: A city builds a new bridge as a public work using tax dollars because no private company would profit from it.

Connections: Role of government in a Mixed Economy; funded by taxes; related to Public Property and Adam Smith's idea that costs are never repaid to individuals.

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Transfer payments

Def: Money the government collects through taxes and gives to households without receiving goods or services in return.

Sentence: A retired worker receiving a Social Security check is receiving a transfer payment.

Connections: Examples: Social Security, welfare, unemployment benefits; added government flow in the Circular Flow Model for a mixed economy; supports Economic Security.

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U.S. Free Enterprise System

Def: An economic system in which the means of production are mostly privately owned and operated for profit.

Sentence: In the US Freee Enterprise System, you can start a business, set your prices, and keep the profit.

Connections: Seven key characteristics: Economic Freedom, Equal Opportunity, Competition, Binding Contracts, Property Rights, Profit Motive, Limited Government; also called the American economic system; a kind of Mixed Economy leaning toward Market.

Chp 3 page 50

Property rights

Def: The rights of those who own land, buildings, or other goods to use or dispose of them as they choose.

Sentence: Because of property rights, you can sell, rent, or paint your hours (or even blow it up) without the government confiscating it.

Connections: Key characteristic of the Free Enterprise System; protected by the Constitution and the courts; includes Intellectual Property; supports Profit Motive.

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Intellectual property

Def: Property that has commercial value but no physical form, such as creations of the mind (inventions, books, music), protected by patents and copyrights.

Sentence: A songwriter's copyright protects her intellectual property by preventing others from selling her song without permission.

Connections: A type of Property Right; Patent = 20 years of sole rights; Copyright = life of the author + 70 years; encourages innovation and the Profit Motive.

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Profit

Def: The money a business earns after subtracting its costs of operation.

Sentence: If a bakery earns $5,000 in sales and spends $4,000 on costs, its profit is $1,000.

Connections: Reward for Entrepreneurship; drives the Profit Motive; the incentive for starting new businesses in the Free Enterprise System.

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Profit motive

Def: The desire to make a profit; the incentive that drives people to work, start businesses, and create new products.

Sentence: Under the profit motive, a student opens a lawn-care business because she wants to earn money.

Connections: Key characteristic of Free Enterprise; Adam Smith said self-interest benefits society; related to Competition and Property Rights; economists see it as a positive force.

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Full employment

Def: Almost all the people who want a job can find work; there should be a job for everyone ready, willing, and able to work. In economic models like the PPF, it means all usable resources are employed in production.

Sentence: When unemployment is very low and nearly everyone looking for work has a job, the economy is near full employment.

Connections: One of the Goals of the US Economy; unemployed workers are a wasted resource; linked to Economic Efficiency and points ON the PPF.

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Economic growth

Def: An increase in the production of goods and services over time, leading to an improved standard of living.

Sentence: Because of new technology, the US produces far more goods per person than it did a century ago; this is an stellar example of economic growth.

Connections: Goal of the US Economy; driven by innovation; shown on the PPF as the curve shifting outward; may conflict with Economic Equity or Security (tradeoffs).

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Economic efficiency

Def: Getting the maximum amount of output from the resources used to produce goods and services with the least amount of waste.

Sentence: A factory that makes more cars using the same workers and materials is increasing its economic efficiency

Connections: Goal of the US Economy; points ON the PPF; supported by Competition and the Market Economy; opposite of waste/unemployment.

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Economic security

Def: The basic needs of every person should be met: food, clothing, shelter, etc.

Sentence: Unemployment benefits help give families economic security if a worker loses a job.

Connections: Goal of the US Economy; supported by Transfer Payments; may trade off with Economic Freedom; societies differ on how much government should provide.

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Economic stability / Price stability

Def: The prices of goods, services, and resources do not fluctuate significantly, up or down, in short periods of time.

Sentence: Because of economic stability (price stability), the price of milk stays about the same from week to week, so people can plan their budgets.

Connections: Goal of the US Economy; opposite of economic uncertainty; allows predictable jobs and purchases; related to the Price System.

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Economic freedom

Def: Freedom of choice in employment, buying, selling, use of our time, and other decisions related to our economy.

Sentence: You are exercising economic freedom when you choose to quit a job and start your own business.

Connections: Goal of the US Economy; highest goal of a Market Economy; Index of Economic Freedom ranks countries; related to Laissez-faire and Limited Government.

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Economic equity

Def: Fairness and impartiality in the economy; the economic system should offer all citizens equal economic opportunities.

Sentence: Laws against pay discrimination aim to promote economic equity between men and women.

Connections: Goal of the US Economy; related to Equal Opportunity; people disagree on what is "fair"; may conflict with Economic Efficiency or Growth.

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Circular flow model

Def: An economic model showing how money, goods, and resources circulate continuously between households and firms in a market economy.

Sentence: In the circular flow model, you work for a firm (labor flows to firms, wages flow to you), then spend the wages on goods (money flows back to firms).

Connections: Shows two markets (Product and Factor); clockwise = flow of resources/goods, counterclockwise = money; Figure 3.3; the mixed version adds government (Figure 3.4A) with taxes and transfer payments.

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Households

Def: Groups of people living together who own the factors of production and buy goods and services; a household can be one person or a group.

Sentence: Your family is a household that sells its labor to a company and uses the wages to buy groceries.

Connections: One of the two participants in the Circular Flow Model; sells in the Factor Market and buys in the Product Market; receives Factor Payments.

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Firms

Def: Organizations that use the factors of production to make and sell goods or services.

Sentence: A local ice cream parlor is a firm that hires workers and sells cones to households.

Connections: The other participant in the Circular Flow Model; buys in the Factor Market and sells in the Product Market; pays Factor Payments to households.

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Product market

Def: The market in which goods and services are sold by firms and purchased by households.

Sentence: Buying a pair of jeans at a local mall happens in the product market.

Connections: Part of the Circular Flow Model; firms sell, households buy; opposite of the Factor Market; money flows from households to firms.

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Factor market / Resource market

Def: The market in which households sell their land, labor, and capital to firms, and firms buy them.

Sentence: When you take a job at a store, you are selling your labor in the factor market (resource market).

Connections: Part of the Circular Flow Model; households sell, firms buy; households receive Factor Payments; opposite of the Product Market.

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Factor payments

Def: Income earned when an individual sells or rents a factor of production he or she owns, such as rent, wages, interest, or dividends.

Sentence: The wages a worker earns from a firm in exchange for her labor are factor payments.

Connections: Flow from firms to households in the Factor Market; land → rent, labor → wages, capital → interest/dividends; become household spending in the Product Market.

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Market competition (competition)

Def: Rivalry among businesses for resources and customers. People everywhere compete for resources and products because they are scarce.

Sentence: Mark competition makes two pizza shops lower prices and improve quality to win the same customers.

Connections: Key characteristic of the Free Enterprise System; gives businesses incentive to improve; benefits consumers through lower prices; related to Scarcity and the Price System.

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Price system

Def: An arrangement that uses monetary prices as messages to facilitate exchanges between buyers and sellers.

Sentence: Through the price system, rising concert ticket prices signal high demand and encourage more shows.

Connections: How a Market Economy coordinates decisions; connects to the "invisible hand"; supports Economic Efficiency and Stability; contrast with planned prices in Command Economies.

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Private property

Def: The resources and products owned by individuals or businesses.

Sentence: Your bike, your family's house, and a local bakery's ovens are all private property.

Connections: Protected by Property Rights; central to the Free Enterprise System and Capitalism; contrast with Public Property; very limited in Command Economies.

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Public property

Def: Resources and products owned by the government.

Sentence: A city park and the public library are public property paid for with tax dollars.

Connections: Contrast with Private Property; often created through Public Works; more common in Command and Mixed economies; funded by taxes.