Chapter 2 Microeconomics

32 vocabulary flashcards summarizing the essential terms and concepts from the lecture on economic systems, market characteristics, fundamental economic questions, and the circular flow model.

Economic System

A set of institutional arrangements that determine how a society allocates scarce resources, decides what, how, and for whom to produce.

Institutional Arrangements

The formal and informal rules, beliefs, and organizations that shape economic decision-making in a society.

Command System

An economic system (socialism/communism) in which the government owns resources and a central planning board makes all economic decisions.

Market System

An economic system (capitalism) based on private ownership of resources with decisions made through decentralized markets.

Private Property

The right of individuals and firms to own, control, and dispose of land, capital, and other resources.

Freedom of Enterprise

The freedom of firms to obtain and use resources, produce products of their choice, and sell them in markets of their choice.

Freedom of Choice

The freedom of owners to employ or dispose of their property and of consumers to buy what they want within their budgets.

Self-Interest

The motivating force whereby each economic unit tries to achieve its own goals, such as profit, utility, or income.

Competition

The presence of many buyers and sellers acting independently, free to enter and leave markets.

Markets and Prices

Mechanisms that bring buyers and sellers together and use price signals to allocate resources.

Advanced Technology

Innovative production methods and capital goods encouraged in a market system to raise productivity.

Capital Goods

Manufactured aids such as machinery and equipment used to produce other goods and services.

Specialization

The use of resources to produce one or a few goods rather than a wide range, improving efficiency.

Division of Labor

Splitting work into separate tasks performed by different workers to boost productivity.

Geographic Specialization

Concentration of particular industries or crops in regions best suited to them.

Use of Money

A socially accepted medium of exchange that facilitates trade by avoiding the need for barter.

Active but Limited Government

Government intervention to correct market failures while allowing markets to operate largely freely.

Five Fundamental Questions

The basic issues every economy must answer: what, how, for whom to produce; how to adapt to change; how to promote progress.

Money Votes

Consumer spending that signals which products should be produced and which should fail.

Least-Cost Production

Producing goods using the combination of resources that minimizes cost per unit.

Creative Destruction

The process by which new products and technologies make existing ones obsolete, driving economic progress.

Invisible Hand

Adam Smith’s concept that individuals pursuing self-interest unintentionally promote society’s interest through market exchange.

Coordination Problem

Difficulty in centrally planned economies of ensuring that set output targets across industries mesh logically.

Incentive Problem

Lack of profit-based signals in command economies, causing shortages and surpluses because prices cannot adjust.

Circular Flow Model

A diagram showing the flow of resources, products, income, and revenue between households and businesses.

Resource (Factor) Market

Market in which households sell and firms buy the factors of production.

Product Market

Market in which firms sell and households buy finished goods and services.

Households

Economic units that own resources, sell them for income, and purchase goods and services.

Businesses

Economic units that buy resources, transform them into products, and sell goods or services for revenue.

Sole Proprietorship

A business owned and managed by a single individual who bears unlimited liability.

Partnership

A business owned by two or more individuals who share profits and responsibility.

Corporation

A legal entity separate from its owners, offering limited liability and the ability to raise capital by issuing stock.