1.2 - Resource Allocation and Economic Systems

Market

Any arrangement that brings buyers and sellers together

Cost

Cost of production (including opportunity cost)

Capital

Man-made tools and equipment used to produce goods and services

Marginal

An additional unit of something

Marginal cost

The additional cost of producing one more unit.

Marginal benefit

The additional benefit gained from consuming or producing one more unit.

Economic System

How a society makes decisions about production and consumption

3 basic economic questions

What to produce? How to produce? For whom to produce?

Traditional economy

what, how, for whom answered by cultural customs

Market economy

what, how, for whom answered by individuals

Invisible hand

The idea that people pursuing their own self-interest can benefit the economy through competition in the market.

Command economy

what, how, for whom answered by government or central economy

Mixed economy

A market based economy that has government interventions for specific purposes (ex. taxes)

Capitalism

mixed economy closest to free-market

Communism

mixed economy closest to command