Untitled Flashcards Set

economic system – the rules and methods put in place by a society to answer the
three fundamental economic questions of “What to produce?,” “How to produce it?,”
and “For whom to produce it?”
 comparative economic systems – the subfield of economics that compares and
contrasts the structure and the performance of different types of economic
organization (i.e., different economic systems).
 four primary economic institutions: households, firms, markets, and government
 households – the most fundamental part of any economic system; ultimate consumers
of most finished goods/services; primary suppliers of labor
 firms – the institutions which transform factors of production into finished
goods/services
 economic resources or factors of production – the inputs such as factories, farms,
stores, trucks, and equipment used to produce goods and services.
 natural assets – natural resources, including minerals, naturally occurring vegetation,
water resources, topographical features, and available agriculturally productive land
 produced assets – the currently available machines, factories, and inventories of
finished goods available as industrial capital, as well as social capital such as
transportation and communications infrastructure, and educational institutions
 human capital – the skills, education, and training which individuals in the labor
force possess
 market – the collection of all potential buyers and all potential sellers of a good or
service.
 government – a decision-making institution with the legal authority to impose
restrictions or mandates on the behavior of other decision-makers (i.e., the ability to
use legal coercion).
 contract – a legal document which specifies what different parties must do, whatever
the external circumstances, and provides enforcement or compensation for non-
performance
 capitalism – economic system in which the means of production are privately owned
and operated for a profit.
 socialism – economic system in which the means of production are owned by the
government.
 feudalism – economic system in which land ownership is restricted to an aristocratic
nobility.
 three dimensions of Private Ownership of Property: (i) “right to control,” (ii)
“right to transfer,” and (iii) “right to restitution.”

 right to control – the right to decide how to use your property.
 right to transfer – the right to obtain ownership of property from or relinquish
ownership of property to another person.
 right to restitution – the right to be compensated by another person when he
damages your property or infringe upon your rights.
 consumer sovereignty – the freedom for an individual to choose to purchase (or to
not purchase) a good or services at a price determined in a free, unfettered market
 Adam Smith – 18th century (1721-1790) Scottish economist, who wrote “An Inquiry
into the Nature and Causes of the Wealth of Nations,” in which he laid out the central
arguments for why private ownership/control of resources and trade in free markets
often result in desirable outcomes
 Invisible Hand – Smith’s recognition that under certain conditions, the behavior of
self-interested decision makers interacting in free markets leads to outcomes which
are better for all parties.
 when the “invisible hand” is applicable, any possible alternative to the market
outcome would be less desirable for some individuals in society.
 “free market forces” are the “invisible hand” that leads us to an outcome that is
“efficient” (in that “total social surplus” is maximized).
 Karl Marx – 19th century (1818-1883) German philosopher, economist, and
revolutionary, who wrote “Das Kapital” (1867, 1884, 1885) and co-wrote (with
Friedrich Engels) “The Communist Manifesto” (1848)
 Bourgeuoisie – the term which Karl Marx used to refer to business owners.
 Proletariat – the term which Karl Marx used to refer to the working class.
 Communism – economic system in which the means of production are collectively
owned by all people in a society (without intervention by a government or state)
 A stateless, classless economic system in which all the factors of production are
owned by the workers and people share in production according to their needs:
“From each according to his ability, to each according to his need” (Louis Blanc
in “The Organization of Work,” 1839)
 New Soviet Man – a person motivated primarily by selfless benevolence.
 Economic Man (or homo economicus) – a person who is both self-interested
and rational (this is the standard assumption within mainstream economics)
 command planning – an environment in which the government directly controls
nearly all economic activity, and almost all production takes place within enterprises
owned/controlled by the government.
 indicative planning – an environment in which the government guides the behavior
of individuals in regards to economic decisions by establishing policies which alter
costs and benefits.
 three primary types of economic incentives: material rewards, moral suasion, and
coercion.
 material rewards – monetary rewards or direct increases in consumption from
engaging in an activity.
 moral suasion – attempts to convince individuals to behave in a certain manner
because doing so is the right thing to do.
 coercion – the use or threat of force or incarceration in order to obtain compliance.

 mixed economy – an economic system in which most factors of production are
owned and controlled by individuals, while some factors of production are owned and
controlled by the state (i.e., a system which contains some elements of capitalism and
some elements of socialism)