Week 2: Market System and Demand & Supply - Vocabulary Flashcards

Vocabulary flashcards covering key terms and concepts from Week 2 notes on the Market System and Demand & Supply.

Laissez-Faire Capitalism

Pure capitalism where the government protects private property and provides the legal framework; agents decide for themselves in pursuit of profit and utility.

Command System

An economic system where the government owns most resources and a central plan directs decisions; agents perform assigned jobs and consume assigned baskets.

Market System

A capitalist or mixed economy with private resources, markets and prices; individuals decide what to produce and buy, and the correct goods are supplied in the right amounts.

Private Property

Individuals and firms can obtain, use, and dispose of property resources as they see fit, typically paying for what they want.

Freedom of Enterprise and Choice

Firms and consumers decide what to sell, what to buy, and where to invest; market participants choose freely.

Self-Interest

Each economic agent acts in what they perceive as their own best interest, guiding decision-making.

Competition

Rivalry between independent buyers and sellers to obtain business by offering the best terms.

Technology and Capital Goods

Incentives to innovate; improvement of production methods; specialization; division of labor; learning by doing; regional specialization.

Money (Medium of Exchange, Unit of Account, Store of Value, Standard of Deferred Payment)

Money is used to buy/sell, measure value, retain value over time, and settle debts and contracts in the future.

Active but Limited Government

Government intervention exists to address market failures but remains limited in scope.

Market Failures

Situations where markets on their own fail to allocate resources efficiently.

Five Fundamental Questions

What goods to produce, how to produce them, who gets the output, how to accommodate change, and how to promote progress.

Invisible Hand

Adam Smith’s idea that private self-interest in a competitive market leads to socially desirable outcomes.

Efficiency

Maximizing output with given inputs; resource use is optimized via prices and competition.

Incentives (Market Incentives)

Rewards or penalties in a market that motivate productive behavior and innovation.

Freedom (Market Freedom)

Individuals and firms have the liberty to choose what to produce, sell, and buy.

Coordination Problem

Difficulties in coordinating economic activity under a command system, leading to inefficiency.

Incentive Problem

Lack of proper motivators under command systems, reducing productive effort.

Circular Flow Model

A diagram showing how households and firms interact through product and resource markets, with flows of goods, services, resources, and money.

Profit System

The motive of profit guides resource allocation in a market economy.

Market Equilibrium

The price-quantity pair where quantity supplied equals quantity demanded; the market clears.

Demand

A schedule or curve showing the quantities consumers are willing and able to purchase at various prices, all else equal.

Demand Curve

A downward-sloping curve showing higher quantity demanded as price falls (law of demand).

Market Demand

The total quantity demanded by all buyers at each price.

Law of Demand

As price decreases, quantity demanded increases, holding other factors constant.

Diminishing Marginal Utility

Each additional unit consumed provides less additional satisfaction.

Income Effect

Change in quantity demanded due to a change in purchasing power from a price change.

Substitution Effect

Change in quantity demanded as consumers substitute cheaper goods for more expensive ones.

Changes in Demand

A shift of the demand curve caused by non-price determinants (income, tastes, prices of related goods, expectations, number of buyers).

Changes in Quantity Demanded

Movement along the same demand curve caused by a price change.

Non-Price Determinants of Demand

Factors like income, tastes, prices of related goods, expectations, and number of buyers that shift the demand curve.

Changes in Supply

A shift of the supply curve caused by non-price determinants (input prices, technology, expectations, number of sellers, taxes, subsidies).

Changes in Quantity Supplied

Movement along the same supply curve caused by a price change.

Supply

A schedule or curve showing the quantities producers are willing and able to offer at various prices (ceteris paribus).

Price Ceiling

A government-imposed maximum price that can lead to shortages.

Price Floor

A government-imposed minimum price that can lead to surpluses.

Surplus

When quantity supplied exceeds quantity demanded at a given price.

Shortage

When quantity demanded exceeds quantity supplied at a given price.

Market

A mechanism where buyers and sellers interact to allocate resources through price signals.

Division of Labor

Breaking production into specialized tasks to increase efficiency and productivity.

Specialization

Focusing resources on a narrow set of tasks or products to boost efficiency.

Learning by Doing

Productivity gains that come from repeated production activity.

Regional Specialization

Geographic concentration of production to exploit comparative advantages.