Chapter 2: The Market System and the Circular Flow

Question 1

Economic system

Answer 1

A set of institutional arrangements and a coordinating mechanism to respond to the economizing problem. Has two polar extremes, the command system and the market system

2.1

Question 2

Command system

Answer 2

A.K.A socialism or communism. In this system, the government owns most property resources and economic decision making occurs through a central economic plan. Two countries still use this system today, North Korea and Cuba

2.1

Question 3

Market system

Answer 3

A.K.A capitalism. A system characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.

2.1

Question 4

Markets

Answer 4

Places where buyers and sellers come together to buy and sell goods, services, and resources

2.1

Question 5

laissez-fair

Answer 5

Pure, stands for “let it be”. Is used to refer to a true market system where the government has no control over the economy

2.1

Question 6

Private property

Answer 6

Extensive private ownership of capital

2.1

Question 7

The 4 benefits of property rights

Answer 7

1. Encourages people to cooperate by ensuring only mutually agreeable economic transactions take place
2. Encourages investment, innovation, exchange, maintenance of property, and economic growth
3. Extends to intellectual property through patents, copyrights, and trademarks
4. Facilitates exchange

2.1

Question 8

Freedom of enterprise

Answer 8

Ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets

2.1

Question 9

What freedom of choice allows and enables

Answer 9

Enables owners to employ or dispose of their property and money as they see fit. Allows workers to try and enter any job that they are qualified for. Ensures consumers are free to buy goods and services to satisfy their wants

2.1

Question 10

Self interest

Answer 10

A motivating force of the various economic units in the market system as they express their free choices. Means that each economic unit tries to achieve its own particular goal, which usually requires delivering something of value to others.

2.1

Question 11

Competition

Answer 11

Something the market system depends on to work. Requires two or more buyers and two or more sellers acting independently in a particular product or resource market and the freedom of sellers and buyers to enter or leave markets, on the basis of their economic self interest

2.1

Question 12

Specialization

Answer 12

Using the resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.

2.2

Question 13

Division of labor

Answer 13

Human specialization that contributes to a society’s output in several ways:

1. Specialization makes use of differences in ability.
2. Specialization fosters learning by doing.
3. Specialization saves time.

2.2

Question 14

Medium of exchange

Answer 14

Makes trade easier. Ex: money

2.2

Question 15

Barter

Answer 15

Swapping goods for good. Ex: wheat for oranges.

2.2

Question 16

Money

Answer 16

A convenient social invention to facilitate exchanges of goods and services. It is socially defined, whatever society accepts, as a medium of exchange is money.

2.2

Question 17

The five fundamental questions of the economy

Answer 17

1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will get the goods and services?
4. How will the system accommodate change?
5. How will the system promote progress?

2.3

Question 18

Consumer sovereignty

Answer 18

Crucial in determining the types and quantities of goods produced. consumers spend their income on the goods they are most willing and able to buy.

2.3

Question 19

“Dollar votes”

Answer 19

What consumers spend their income on designates what their wants are in the market

2.3

Question 20

Creative destruction

Answer 20

The creation of new products and production methods completely destroys the market positions of firms that are welded to existing products and older ways of doing business.
Ex: Roku replacing CD’s

2.3

Question 21

Invisible hand

Answer 21

Simultaneously promoting the public or social interest

2.4

Question 22

How the market system is efficient

Answer 22

Promotes the efficient use of resources by guiding them into the production of the goods and services most wanted by society. It forces the use of the most efficient techniques in organizing resources for production and producing things efficiently.

2.4

Question 23

What are the market systems incentives

Answer 23

Encourages skill acquisition, hard, work, and innovation

2.4

Question 24

Circular flow diagram

Answer 24

Illustrates the flow of goods and services, resources, and money for a simplified economy in which there is no government

2.4

Question 25

Households

Answer 25

One or more persons occupying a housing unit. They buy the goods and services that businesses make and sell resources in the resource market.

2.4

Question 26

Businesses

Answer 26

Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale. Falls into three categories, a sole proprietorship, a partnership, and a corporation.

2.4

Question 27

Sole proprietorship

Answer 27

A business owned and managed by a single person

2.4

Question 28

Partnership

Answer 28

A business owned and managed by two or more individuals that share profits and losses

Question 29

Corporation

Answer 29

Independent legal entity that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and engage in any legal business activity
Ex: Google, Ford, Walmart

2.4

Question 30

Product market

Answer 30

The place where the goods and services produced by businesses are bought and sold

2.4

Question 31

Resource market

Answer 31

Where households sell resources to businesses

2.4