Chapter 2 Flashcards
(19 cards)
A medium of exchange
Currency
What are the five fundamental questions
1) what are we going to produce
2) how are we gonna produce it
3) for who
4) how do we handle change
5) promote?
This means it belongs to you
Private property rights
Says there is an invisible hand in the market and wrote the book “wealth of Nations”
Adam Smith
Trading one good for another
Barter
What are the two market systems
Free-market system and a command economy
What are two problems with command economies
No coordination
no incentives
Ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services
Freedom of enterprise
The creation of new products destroys the market positions of firms that are wedded to existing products and older ways
Creative destruction
Independent legal entity
Corporation
Look at the circular flow model
Firms get payments from households
households get goods and services from firms
firms get land labor capital and entrepreneurship’s from households
1) households own all factors of production
2) households spend all income on goods
Households sell resources to businesses
Resource market
What happens when people aren’t spending
Recession
Enables owners to employ or dispose of their property and money as they see fit
Freedom of choice
Motivating force of the various economic units as they express their free choices
Self interest
Three merits of market system
Efficiency
Incentives
Freedom
Business owned and managed by single person
Sole proprietorship
Form of business organization is a natural outgrowth of the sole proprietorship
partnership
Place where goods and services produced by businesses are bought and sold
Product market
