Economics Chapter 2

Free Enterprise + Other Economic Systems

Economic System

the framework a society uses to organize the production, distribution, and consumption of goods and services, determining how resources are allocated, who makes the decisions, and who benefits

Factor Payments

the costs a business pays to the owners of the factors of production—land, labor, capital, and entrepreneurship—for their contributions to producing goods and services

Profit

the excess revenue over total costs

Safety Net

a system of government programs and policies that provide a minimum level of support to individuals and families facing financial hardship, unemployment, illness, or other crises

Standard of Living

the quantity and quality of goods and services available to an individual or population, often measured by factors like income, access to housing, healthcare, education, and comfort levels

Innovation

the implementation of a new or improved product, process, service, or business model that creates value and drives economic growth

Traditional Economy

an economic system that relies on customs, traditions, and established practices to guide the production and distribution of goods and services

Market

a system where buyers and sellers interact to exchange goods, services, or information, determining prices through the forces of supply and demand

Specialization

the practice of individuals, firms, or countries focusing their resources on producing a limited range of goods or services, rather than attempting to produce many things

Free Market Economy

is an economic system where prices for goods and services are determined by voluntary exchanges between buyers and sellers, driven by the forces of supply and demand, rather than government regulation

Household

the basic unit of consumption and, in the circular flow of the economy, the supplier of productive resources

Firm

an organization that combines inputs like labor, capital, land, and materials to produce goods or services for sale in the marketplace, with the primary goal of generating profit

Factor Market

a marketplace where the four factors of production are bought and sold

Adam Smith

argued that individual self-interest, when guided by an "invisible hand" in a free and competitive market, naturally leads to societal prosperity by promoting efficient resource use and innovation

Self-interest

the principle that individuals act to maximize their own personal gain or well-being, making decisions based on what they believe is best for themselves rather than solely for others

Incentive

a reward or penalty that influences individuals, businesses, or governments to take specific actions or make particular decisions

Competition

the rivalry between two or more businesses striving for the same customers or market share, often leading them to offer better prices, quality, or service

Consumer Sovereignty

the concept that consumers, through their purchasing decisions in a free market, ultimately determine what goods and services businesses produce

Centrally Planned Economy

an economic system where a central authority, typically the government, makes all major decisions regarding the production, distribution, and pricing of goods and services, with the state owning most industries and resources

Command Economy

a system in which a central governmental authority sets permitted levels of production, as well as the terms of distribution and pricing

Socialism

a theory where the means of production are owned or controlled collectively, typically by the state or community, rather than by private individuals

Communism

a system of collective ownership and control of the means of production are owned by the community, rather than individuals

Authoritarian

a political system where a centralized power or elite controls the economy and dictates economic policy to serve its own interests, often repressing the economic freedoms of its citizens

Laissez Faire

philosophy advocating for minimal to no government intervention in the free market

Private Property

assets owned and controlled by private individuals or entities (not the government), granting them the legal right to use, manage, and dispose of those assets as they see fit, subject to laws and regulations

Mixed Economy

an economic system that blends characteristics of both market economies and command economies

Economic Transition

the structural process where an economy shifts from one system to another, most commonly from a centrally planned economy to a market-based one, involving fundamental changes in production, distribution, and consumption

Privatization

the process of transferring ownership and control of an enterprise, industry, or service from the public sector (the government) to the private sector (private individuals or companies)

Profit Motive

the fundamental drive for individuals and businesses to seek financial gain through their economic activities, such as producing and selling goods and services

Open Opportunity

a market system where everyone has the freedom and the right to compete and participate in the economy based on their own choices and efforts, rather than being limited by their background or birthright

Legal Equality

the principle that all individuals and businesses are subject to the same laws, regulations, and legal processes, ensuring equal treatment under the law, property rights, and contract enforcement.

Private Property Rights

grant individuals or entities legal authority to own, control, use, and transfer property without interference, fostering market economies by incentivizing investment, innovation, and efficient resource allocation

Free Contract

allows individuals and entities to enter into legal agreements on terms they mutually choose, without undue government interference or restriction

Voluntary Exchange

allows individuals and entities to enter into legal agreements on terms they mutually choose, without undue government interference or restriction

Interest Group

a formal or informal organization composed of individuals or groups with shared interests, such as businesses, labor unions, or professional associations, that seeks to influence public policies and regulations to benefit their members or sector

Patriotism

economic choices, policies, and strategies that prioritize and benefit domestic firms, sectors, or citizens within a nation's territorial boundaries; aims to favor "insiders" by shaping market outcomes to benefit them

Eminent Domain

the government's inherent power to take private property for public use, provided it pays "just compensation" to the owner

Public Interest

the collective welfare and well-being of the general public, emphasizing societal needs over private or individual desires, and serving as a foundation for policies aimed at fairness, social order, and overcoming market failures like externalities

Public Disclosure Laws

mandate that companies or governments make relevant information available to the public, aimed at reducing information asymmetry, improving market efficiency, and fostering accountability

Macroeconomics

the branch of economics focused on understanding the performance of entire national or regional economies, rather than individual markets or consumers

Microeconomics

the branch of economics that studies the behavior of individual economic agents, such as consumers and firms, and how they make decisions about allocating scarce resources, determining prices, and interacting in individual markets

Gross Domestic Product

the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period

Business Cycle

the recurring and alternating periods of expansion and contraction in a nation's overall economic activity, as measured by real Gross Domestic Product (GDP)

Referendum

a direct vote by the electorate on a specific economic issue or policy, rather than a decision made solely by elected representatives

Obsolescence

the loss of value or usefulness of an asset due to external factors, such as changes in market demand, new technologies, or zoning laws

Patent

a government-granted exclusive right that allows an inventor to prevent others from using, selling, or making their invention for a limited time (typically 20 years) in exchange for public disclosure of the invention

Copyright

an intellectual property protection that grants creators exclusive rights to reproduce, distribute, and use their original works, providing an economic incentive to innovate and create by allowing them to control their creation and monetize it

Work Ethic

the value placed on productive labor itself, not just for its output or economic reward, but as a virtue, a moral obligation, and a source of personal fulfillment

Public Good

a product, service, or commodity that is both non-excludable and non-rivalrous: it's impossible or prohibitively costly to prevent anyone from using it, and one person's use of the good does not diminish its availability for others

Public Sector

the part of an economy that is owned and controlled by the government, encompassing all federal, state, and local government entities, public corporations, and institutions

Private Sector

part of the economy composed of privately owned businesses, organizations, and individuals, not the government

Infrastructure

the fundamental physical and organizational systems necessary for an economy's operation and development, encompassing essential facilities like transportation, energy, water, and communication networks

Free Rider

an individual or entity that benefits from a public good or service without contributing to its cost

Market Failure

a situation where the allocation of goods and services by a free market is inefficient, leading to a suboptimal outcome for society as a whole.

Externality

the side effect of an economic activity that affects an uninvolved third party who did not choose to incur that cost or benefit

Poverty Threshold

a specific dollar amount that represents the minimum income a family needs to afford basic necessities like food, clothing, and shelter, thereby avoiding economic privation

Welfare

the overall well-being or satisfaction of individuals in an economy, often considered as the sum of individual satisfactions or measured by economic indicators like consumer and producer surplus