Topic 2: Free Enterprise and Economic Systems

Economic System

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

Factor Payments

the income people receive in return for supplying their land, labor or capital

Profit

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

Safety Net

a set of programs to 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

relies on habit, custom, or ritual to answer the three economic questions

Market

any arrangement that allows buyers and sellers to exchange things

Specialization

concentrating productive effort on a limited number of activities

Free Market Economy

answers to the three economic questions are made by voluntary exchange in markets

Household

a person or group living in a single residence

Firm

an organization that uses resources to produce a product or service to sell

Factor Market

the market in which firms purchase the factors of production from households

Product Market

the market in which households purchase goods and services from firms

Adam Smith

Economist who wrote Wealth of Nations; Laissez-Faire economics

Self-Interest

a person's own personal gain

Incentive

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

Competition

struggle among producers for the dollars of consumers

Consumer Sovereignty

the idea that consumers hold the power to decide what gets produced

Centrally Planned Economy

the government answers the three basic questions; command economy

Socialism

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

Communism

the central government owns and controls all resources and means of production and makes all economic decisions; derived from the writings of Karl Marx

Authoritarian

government that limits individual freedom and requires strict obedience from its citizens

Laissez-Faire

the doctrine that the government generally should not intervene in the marketplace

Private Property

property owned by individuals or companies and not by the government

Intellectual Property

intangibles such as ideas, music, art, photos, logos, movies that are the result of creativity and intellectual effort

Mixed Economy

an economic system that has some market-based elements and some government involvement

Economic Transition

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

Privatization

selling enterprises operated by the government to individuals and then allowing them to compete in a marketplace

Profit Motive

drives individuals and businesses to make decisions that improve their material well-being

Open Opportunity

the principle that anyone can compete in the marketplace

Legal Equality

the principle that everyone has the same legal rights

Private Property Rights

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

Free Contract

allows people to decide what agreements they want to enter into

Voluntary Exchange

allows consumers and producers to decide what, when and how they will buy and sell

Interest Group

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

Eminent Domain

the government's right to take private property for public use

Public Interest

the concerns of society as a whole

Public Disclosure Laws

requires companies to give consumers important information about the products or services they offer

Macroeconomics

the study of the economic behavior and decision-making in a nation's whole economy

Microeconomics

the 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 an economy in a given year

Business Cycle

the alternating pattern of periodic expansion and contraction

Referendum

proposed laws on spending or other economic issues submitted directly to the public for a vote

Obsolescense

an effect of innovation in which older products and processes become out of date

Patent

gives the inventor of a new product the exclusive right to produce and sell it for 20 years

Copyright

grants an author exclusive rights to publish and sell his or her creative works

Work Ethic

commitment to the value of hard 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 and economy to function efficiently and grow

Free Rider

someone who enjoys the benefit of a good or service, but is not willing to pay for it

Market Failure

a situation in which the free market does not distribute resources efficiently

Externality

an economic side effect of a good or service that generate costs or benefits to someone other than the producer or consumer

Poverty Threshold

an income level below that which is needed to support a family

Welfare

a general term for government aid to the poor