Chapter 3

Question 1

economic system

Answer 1

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?”

Question 2

comparative economic systems

Answer 2

the subfield of economics that compares and contrasts the structure and the performance of different types of economic organization (i.e., different economic systems)

Question 3

four primary economic institutions

Answer 3

households, firms, markets, and government

Question 4

natural assets

Answer 4

natural resources, including minerals, naturally occurring vegetation, water resources, topographical features, and available agriculturally productive land

Question 5

produced assets

Answer 5

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

Question 6

human capital

Answer 6

the skills, education, and training which individuals in the labor force possess

Question 7

market

Answer 7

the collection of all potential buyers and all potential sellers of a good or service

Question 8

government

Answer 8

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)

Question 9

contract

Answer 9

a legal document which specifies what different parties must do, whatever the external circumstances, and provides enforcement or compensation for non-performance

Question 10

capitalism

Answer 10

economic system in which the means of production are privately owned and operated for a profit

Question 11

socialism

Answer 11

economic system in which the means of production are owned by the government

Question 12

fuedalism

Answer 12

economic system in which land ownership is restricted to an aristocratic nobility

Question 13

three dimensions of private ownership of property

Answer 13

1. right to control
2. right to transfer
3. right to restitution

Question 14

right to control

Answer 14

the right to decide how to use your property

Question 15

right to transfer

Answer 15

the right to obtain ownership of property from or relinquish ownership of property to another person

Question 16

right to restitution

Answer 16

the right to be compensated by another person when they damage your property or infringe upon your rights

Question 17

consumer sovreignty

Answer 17

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

Question 18

Adam Smith

Answer 18

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 argument for why private ownership/control of resources and trade in free markets often result in desirable outcomes

Question 19

Invisible Hand

Answer 19

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 this is applicable, any possible alternative to the market outcome would be less desireable 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.).

Question 20

Karl Marx

Answer 20

19th century (1818-1883) German philosopher, economist, and revolutionary, who wrote “Das Kapital” and co-wrote (with Friedrich Engels) “The Communist Manifesto”

Question 21

bourgeuoisie

Answer 21

the term which Karl Marx used to refer to business owners

Question 22

proletariat

Answer 22

the term which Karl Marx used to refer to the working class

Question 23

Communism

Answer 23

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

Question 24

New Soviet Man

Answer 24

a person motivated primarily by selfless benevolence

Question 25

Economic Man (homo economicus)

Answer 25

a person who is both self-interested and rational (this is the standard assumption within mainstream economics)

Question 26

command planning

Answer 26

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

Question 27

indicative planning

Answer 27

an environment in which the government guides the behavior of individuals in regards to economic decisions by establishing policies which alter costs and benefits

Question 28

material rewards

Answer 28

monetary rewards or direct increases in consumption from engaging in an activity

Question 29

moral suasion

Answer 29

attempts to convince individuals to behave in a certain manner because doing so is the right thing to do

Question 30

coercion

Answer 30

the use or threat of force or incarceration in order to obtain compliance

Question 31

mixed economy

Answer 31

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)