CHAPTER 2 Flashcards

Quick Learn (21 cards)

1
Q

What is an economic system?

A

A method used to motivate, coordinate, and direct economic activity

Economic systems include market systems, command systems, and mixed systems.

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2
Q

What are the two polar extremes of economic systems?

A
  • Market system (Capitalism)
  • Command system (Socialism or communism)
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3
Q

What characterizes a command system?

A
  • Government owns most property resources
  • Central economic plan
  • Central planning board makes decisions
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4
Q

What are the two insurmountable problems of command systems?

A
  • The coordination problem
  • Lack of incentives
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5
Q

What is the coordination problem in command systems?

A

Central planners had to coordinate millions of individual decisions by consumers, resource suppliers, and businesses

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6
Q

What is the lack of incentives in command systems?

A

No incentive to do more

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7
Q

What are the characteristics of a market system?

A
  • 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
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8
Q

What are the five fundamental economic questions?

A
  • 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?
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9
Q

What determines what goods will be produced in a market system?

A

Goods and services produced at a continuing profit will be produced contrary to those at continuing loss

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10
Q

How are goods produced in a market system?

A

In combinations and ways that minimize the cost per unit of output

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11
Q

What influences the most efficient production technique?

A
  • Availability of technology
  • Prices of the needed resources
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12
Q

How is market price determined?

A

By the ability and willingness to pay its market price

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13
Q

How do market systems accommodate change?

A

Through changes in prices and profits leading to appropriate responses

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14
Q

How do market systems promote progress?

A
  • Technological advancement
  • New and improved methods that reduce production costs
  • Concept of ‘Creative destruction’
  • Capital accumulation
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15
Q

What is the ‘Invisible Hand’ according to Adam Smith?

A

A metaphor for the self-regulating nature of the marketplace

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16
Q

What economic systems were established in North and South Korea after WWII?

A
  • North Korea: Command economy
  • South Korea: Market economy
17
Q

What is the average annual income in South Korea compared to North Korea?

A

South Korea: $39,500
North Korea: $1,700

18
Q

What happened to Venezuela’s economy?

A

Once prosperous, it now faces starvation due to economic mismanagement

19
Q

What is consumer sovereignty?

A

The idea that consumers dictate what goods and services are produced

20
Q

Fill in the blank: The method used to motivate, coordinate, and direct economic activity is called an _______.

A

economic system