Economic Systems and Circular Flow

Flashcards covering key concepts from the lecture notes on economic systems, globalization, and the circular flow of goods, services, and money.

What are the four basic economic questions that economic systems address?

Which goods and services will be produced? How many goods and services will be produced? How will goods and services be produced? For whom will goods and services be produced?

What is a planned economy?

An economic system in which the government makes decisions on what, how, and for whom to produce.

Who was a great supporter of planned economies?

Karl Marx, the German philosopher.

List four characteristics of a planned economy.

Government control of economic activities; price control; wage control; nationalization; no competition; no profit motive; no freedom of choice.

Why does a centrally planned economy not support globalization?

Because prices are determined by the government, not by the interaction of demand and supply.

What is a market economy?

An economic system in which economic problems are solved by the interaction of demand and supply (market forces).

What is another name for a market economy?

Capitalism.

Who formulated the ideas behind a market economy?

A group of economic philosophers who believed government intervention prevents economic improvement.

Who described how the economy will work without government interference?

Adam Smith, in his book "Wealth of Nations."

List four characteristics of a market economy.

Private ownership; freedom of choice; profit motive; market forces; free competition; no government intervention.

How does capitalism support globalization?

By maintaining that goods and services must be traded without government restrictions.

What is a mixed economy?

An economic system in which both the private and public sectors take part in production, distribution, and consumption.

When was the mixed economic system introduced in Europe and the USSR?

After the collapse of communism.

List four characteristics of a mixed economy.

Private initiative combined with some government control; factors of production owned by both private businesses and the government; prices of products from state-owned businesses are determined by the government, while prices from private businesses are determined by demand and supply; businesses in the private sector aim to make profits, while state-owned businesses may not.

How does a mixed economy support globalization?

Governments, private businesses, and private individuals can trade from different countries.

What is circular flow?

A flow of resources, money, and goods and services from one economic sector to another.

What does 'closed' economy mean?

Production and consumption takes place inside the country. Activities of trade with other countries (foreign trade) are not included.

Identify the groups that make up the 'household sector'.

People living at home, including people living alone, as families, as groups, in hostels, etc.

What is the role of the household sector?

They are the owners of factors of production, they supply businesses with these factors, and they consume the finished goods and services.

What is the household sector also called?

The consumption sector.

What groups make up the 'business sector'?

Industries which acquire resources, process them, and distribute goods and services to consumers.

What is the role of the business sector?

To buy factors of production from households and supply households and the government with finished goods and services.

What is the business sector also called?

The production sector.

What is the factor market?

The market in which factors of production are bought and sold.

What is the consumer market?

The market in which goods and services are bought and sold.

Which sector is made up of the local, provincial and national government?

The government sector.

What is the main role of the government sector?

To maintain order and stability in the economy.

What is the government sector also called?

The public sector.

What are the factors of production that flow from households to businesses?

Natural resources/raw materials, labor, capital, and entrepreneurship.

What are real flows?

The flows of factors of production and goods and services.

List the ways businesses use money in the circular flow.

To pay for factors of production (rent, wages, interest, profit) and to pay corporate income tax.

List the ways households use money in the circular flow.

To buy goods and services and to pay income tax.

List the ways governments use money in the circular flow.

To pay for public goods and services and to offer financial assistance to businesses.

What are money flows?

The flows of money in the circular flow.

What is cost price (CP)?

The purchase price of the goods.

What is profit mark-up (PM)?

The percentage you'll add to the cost price.

What is selling price (SP)?

The price at which you sell the product to customers.

What is the relationship between cost price, profit mark-up, and selling price?

CP + PM = SP

Adam Smith's invisible hand determines what in a market?

An equilibrium price

What is globalization?

Sharing resources amongst people of the whole world, no matter where they originate from.

In the formula CP + PM = SP, Which has a fixed constant of 100%?

CP (Cost Price)

What can increase price if demand is greater than supply in market forces?

Market Price

In a mixed market where are prices determined?

Prices from private businesses are determined by demand and supply and prices of products from State-owned businesses are determined by the government.

What are the benefits of household taxes to the economy?

Household taxes enable government to provide facilities such as state hospitals and schools.

Labour is the human / needed.

effort/input

What is the formula to calculate a profit %

Profit/cost of sale x 100%

The three major economic systems are

Planned economy, a market economy and a mixed economy

State four factors of production

Labour, capital, land, and entrepreneurship

Name three economic sectors

The primary sector, the secondary sector and the tertiary sector

What is the primary sector

The primary sector includes all industries (called primary industries) that take raw materials from the earth

What does a closed economy not allow?

importing and exporting to and from other countries; other countries from buying or selling shares on its stock market, its residents from working in other countries, or foreigners from working in their country.

Explain the statement. When demand increases the demand curve shifts to the right.

Changes in demand can occur when there are changes in market conditions.