Topic 2: Free Enterprise and Other Economic Systems

economic system

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

factor payments

the income people receive in return for supplying factors of production

profit

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

safety net

a set of government programs that 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

an economic system that relies on habit, custom, or ritual to decide the three basic economic questions

market

any arrangement that allows buyers and sellers to exchange things

specialization

the concentration of the productive efforts of individuals and businesses on a limited number of activities

free market economy

an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets

household

a person or group of people living in a single residence

firm

an organization that uses resources to produce a product or service, which it then sells

factor market

the arena of exchange in which firms purchase the factors of production from households

product market

the arena of exchange in which households purchase goods and services from firms

Adam Smith

(1723 - 1790) he was the first modern economist, whose book "The Wealth of Nations" describes how free markets function and self-regulate. In addition to economics, Smith published works on moral philosophy. His economic ideas have influenced many countries around the world, including the United States

self-interest

an individual's own personal gain

incentive

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

competition

the struggle among producers for the dollars of consumers

consumer sovereignty

the power of consumers to decide what gets produced

centrally planned economy

an economic system in which the government makes all decisions on the three key economic questions

command economies

another name for a centrally planned economy

socialism

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

communism

a political system in which the government owns and controls all resources and means of production and makes all economic decisions

authoritarian

describes a form of government that limits individual freedoms and requires strict obedience from its citizens

laissez faire

the doctrine that government generally should not intervene in the marketplace

private property

property that is owned by individuals or companies, not by the government or the people as a whole

intellectual property

creations, such as books, songs, or symbols, that consists of ideas rather than physical objects

mixed economy

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

economic transition

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

privatization

the process of selling businesses or services operated by the government to individual investors, and then allowing them to compete in the marketplace

profit motive

the incentive that drives individuals and business owners to 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 principle that people have the right to control their possessions and use them as they wish

free contact

the principle that people may decide what agreements they want to enter into

voluntary exchange

the principle that people may decide what, when, and how they want to buy and sell

interest group

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

patriotism

love of one's country

eminent domain

the right of government to take private property for public use

public interest

the concerns of society as a whole

public disclosure laws

laws requiring companies to provide information to consumers about their products and services

Macroeconomics

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

Microeconomics

the study of the economic behavior and decision making of small units, such as households and firms

Gross Domestic Product

The total value of all final goods and services produced in a country in a given year

business cycle

a period of macroeconomic expansion, or growth, followed by a period of contraction, or decline

Referendums

a proposed law submitted directly to the public

obsolescence

situation in which older products and processes become out-of-date

patent

a government license that gives the inventor of a new product the exclusive right to produce and sell it

Copyright

a government license that grants and author exclusive rights to publish and sell creative works

work ethic

a commitment to the value of 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 to function and grow

free rider

someone who would not be willing to pay for a certain good or service but who would get the benefits of it anyway if it were provided as a public good

market failure

a situation in which the free market, operating on its own, does not distribute resources efficiently

Externality

an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume

poverty threshold

an income level below that which is needed to support families or households

welfare

government aid to the poor