Open Market Dynamics and Economic Systems (Lecture Notes)

Vocabulary flashcards covering key terms from the lecture notes on open market economy, economic systems, and market vs. command dynamics.

Open Market Economy

An economy that allows competition and choices, where the market decides outcomes; characterized by openness and free entry for participants.

Economic Agents

The players in the economy (e.g., families, firms, governments, foreign entities) who engage in economic activity.

Markets

The 'play fields' where buyers and sellers interact to exchange goods and services.

Openness

The degree to which participants can enter and engage in economic activity, including free entry and international trade.

Open vs. Closed Economies (Autarky)

A spectrum describing how much a country engages in international trade; open economies trade internationally, closed/autarky economies do not.

Autarky

A closed economy with little or no involvement in international trade.

Importing

The process of buying goods internationally from other countries.

Exporting

The process of selling goods to other countries.

Market Economy

An economy driven by consumer demand, with private ownership of resources and means of production; owners decide what, when, and how to produce.

Command Economy

An economy driven by the government, with control over resources and production decisions and restrictions on ownership.

Authoritarianism

A system where political power concentrates and government control can exist with or without democratic structures, including control over economic decisions.

Transition from Market to Command

The easiest path is through government action; lobbying can influence policy, leading to government-determined ownership and production controls.

Four Groups of Economic Agents

Families, firms, governments, and foreign entities—the main categories of economic actors.

Economic Activity

Buying, selling, production, and labor—activities that affect the state of the economy.

Households (Macro Unit)

The basic macroeconomic unit; the smallest unit with cash inflow and outflow, encompassing all economic activities, not just consumption.

Business Firms

Entities engaging in professional or commercial activity for profit; non-profits operate to meet statutory goals; profit is necessary for viability.

Non-profits

Organizations that generate profits designated to statutory goals rather than distributed to owners.

Distortions (Market Distortions)

Factors that prevent efficient market outcomes; examples include conditions that allow unprofitable firms to operate abnormally.

Business Form vs. Business Firm

Business Firm: an economic agent engaging in economic activity; Business Form: the legal structure (e.g., sole proprietorship, partnership, LLC, corporation).

Sole Proprietorship

The most common business form; owned and run by a single person.

Partnership

A business owned by two or more people; forms include general, limited, and limited liability partnerships.

Limited Liability Partnership (LLP)

A partnership with limited liability protections for partners, common among licensed professionals.

Corporation

A separate legal entity (private or public) formed by articles of incorporation; can raise funds via an IPO and distribute dividends.

Corporations and IPO

Corporations can raise resources by selling shares through an Initial Public Offering (IPO); shareholders may receive dividends.

Government as an Economic Agent

A political subdivision (federal, state, local) that influences the economy through taxes, spending, and laws.

Government Spending and Taxation

Politicians borrow rather than raise taxes, creating deficits that future generations must pay.

Foreign Sector

Parts of the economy outside the domestic economy, including households, firms, and government abroad; the four agents interact with it.

Market Failure

A situation where markets fail to allocate resources efficiently, justifying government intervention.

Role of Government in a Market Economy

A generally limited role; intervention is justified when the market fails to provide desired outcomes.

Public Safety/External Safety

Government provision of security (police, military) to protect citizens and maintain order; used as a justification for intervention.

Price Ceilings and Floors

Government-imposed maximum (ceiling) or minimum (floor) prices in a market.

Minimum Wage

A price floor for labor; an example of a price floor that can distort employment outcomes.