CHAPTER 2 Flashcards
Quick Learn (21 cards)
What is an economic system?
A method used to motivate, coordinate, and direct economic activity
Economic systems include market systems, command systems, and mixed systems.
What are the two polar extremes of economic systems?
- Market system (Capitalism)
- Command system (Socialism or communism)
What characterizes a command system?
- Government owns most property resources
- Central economic plan
- Central planning board makes decisions
What are the two insurmountable problems of command systems?
- The coordination problem
- Lack of incentives
What is the coordination problem in command systems?
Central planners had to coordinate millions of individual decisions by consumers, resource suppliers, and businesses
What is the lack of incentives in command systems?
No incentive to do more
What are the characteristics of a market system?
- Private property
- Freedom of enterprise and choice
- Self-interest
- Competition
- Markets and prices
- Technology and capital goods
- Specialization
- Division of labour
- Geographic specialization
- Use of money
- Active but limited government
What are the five fundamental economic questions?
- What goods and services will be produced?
- How will the goods and services be produced?
- Who will get the goods and services?
- How will the system accommodate change?
- How will the system promote progress?
What determines what goods will be produced in a market system?
Goods and services produced at a continuing profit will be produced contrary to those at continuing loss
How are goods produced in a market system?
In combinations and ways that minimize the cost per unit of output
What influences the most efficient production technique?
- Availability of technology
- Prices of the needed resources
How is market price determined?
By the ability and willingness to pay its market price
How do market systems accommodate change?
Through changes in prices and profits leading to appropriate responses
How do market systems promote progress?
- Technological advancement
- New and improved methods that reduce production costs
- Concept of ‘Creative destruction’
- Capital accumulation
What is the ‘Invisible Hand’ according to Adam Smith?
A metaphor for the self-regulating nature of the marketplace
What economic systems were established in North and South Korea after WWII?
- North Korea: Command economy
- South Korea: Market economy
What is the average annual income in South Korea compared to North Korea?
South Korea: $39,500
North Korea: $1,700
What happened to Venezuela’s economy?
Once prosperous, it now faces starvation due to economic mismanagement
What is consumer sovereignty?
The idea that consumers dictate what goods and services are produced
Fill in the blank: The method used to motivate, coordinate, and direct economic activity is called an _______.
economic system
