Prentice Hall Economics: Chapter 2: Economic Systems

Economic system

The structure of methods/principles a society uses to produce/distribute goods/services

Factor payment

Income received by people in return for supplying factors of production

Profit

The amount of money a business receives in excess or its expenses

Safety net

Set of government programs that protect people who face unfavorable economic conditions

Three economic questions

1. What goods and services should be produced?

2. How should these goods and services should be produced?

3. Who consumes these goods and services?

Four economic goals

1. Economic efficiency

2. Economic security

3. Economic equity

4. Economic growth

Standard of living

Level of economic prosperity

Innovation

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

Traditional economy

An economic system that relies on habit, custom, or ritual to decide the three economic questions

Market

Any arrangement that allows buyers/sellers to exchange things

Specialization

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

Free market economy

An economic system in which the three economic decisions are based on voluntary exchange in markets

Household

A person/group of people living in a single residence

Firm

Organization that uses resources to produce product/service which is then sold

Factor market

Arena of exchange in which firms purchase factors or production from households

Product market

Arena of exchange in which households purchase goods/services

Circular flow model

A diagram that represents the exchanges that take place in a free market economy

Incentive

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

Self-interest

Individual's own personal gain

Competition

Struggle among producers for consumers' dollars

Invisible hand

Term used to describe the self-regulating nature of the marketplace

Consumer soverignty

The power of consumers to decide what gets produced

Centrally planned/command economy

Economic system in which government makes the all decisions on the three economic questions

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/controls all resources/means of production and makes all economic desicions

Authoritarian

A from of government that limits individual freedoms and requires strict obedience from citizens

Disadvantages of centrally planned economies

1. Little economic efficiency

2. Little economic freedom

3. Little economic growth

4. Little economic equity

Laissez faire

The doctrine that government should generally not intervene in the marketplace

Private property

Property owned by individuals/companies

Mixed economy

A market-based economic system in which the government is involved to some extent

Economic transition

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

Privatization

The process of selling government-operated businesses/services to individual investors and allowing them to compete in the marketplace

Free enterprise system

An economic system characterized by private or corporate ownership of capital goods

Monetary flow in the factor market

Firms pay households for factors of production

Physical flow in the factor market

Households supply firms with factors of production

Monetary flow in the product market

Households pay firms for goods and services

Physical flow in the product market

Firms supply households with goods and services