Chapter 2: The Market System

Vocabulary flashcards covering key terms from the notes on economic systems and the market system.

Economic System

A set of institutional arrangements and a coordinating mechanism that responds to the economizing problem by deciding what to produce, how to produce, who gets what is produced, how to accommodate change, and how to promote technological progress.

Laissez-Faire Capitalism

A pure form of capitalism with minimal government involvement; the government should leave businesses alone; there is no truly pure system in practice.

Command System

An economy in which the government owns most resources and central planners make production and distribution decisions.

Market System

An economy that blends private ownership with some government intervention and coordinates economic activity through markets and prices.

Private Property

The legal right to own land and capital, enabling investment, growth, and the protection of intellectual property (patents, copyrights, trademarks).

Self-Interest

The driving motive for entrepreneurs to maximize profit, workers to seek the best job, and consumers to obtain goods at the lowest price.

Competition

A market condition requiring two or more buyers and sellers, with freedom to enter or exit, so no single actor can control the market.

Markets and Prices

The coordinating mechanism of capitalism that uses prices and markets to allocate resources and coordinate economic activity.

Freedom of Enterprise and Choice

Freedom to obtain and use resources to produce goods and services, to employ and dispose of property, to choose jobs, and for consumers to choose what to buy.

Specialization

Dividing labor into tasks to increase efficiency and productivity.

Division of Labor

Human specialization that saves time, enables learning by doing, and increases overall output.

Use of Money

Money functions as the medium of exchange that makes trade easier.

Barter

Direct exchange of goods without money; depends on a coincidence of wants and is less efficient than money.

Active, but Limited Government

In a market system, government is active where needed (e.g., regulation, public goods) but does not micromanage markets.

Mixed Economy

An economy that combines free markets with government intervention and regulation.

Pure Planned Economy

An economic system in which the government plans and controls all production and resource allocation.

Pure Free Market

An economy with private ownership and decisions made by markets with minimal government intervention.

Intellectual Property

Legal rights protecting creators’ innovations and brands (patents, copyrights, trademarks) to encourage investment.

Two or More Buyers and Sellers

A requirement for competition; ensures no single buyer or seller can dominate the market.