Economics Chapter 2: Economic Systems

Economic Systems

• Economic System: The structure of methods and principles a society employs to produce and share goods and services.
• Factor Payment: Income earned by individuals in return for contributions of land, labor, or capital.
• Profit: Revenue exceeding the expenses of a business.
• Safety Net: Programs designed to protect individuals facing economic hardships like layoffs or disasters.
• Standard of Living: A measure of the economic prosperity, encompassing wealth and luxury.

Economic Concepts

• Innovation: The introduction of new methods, products, or ideas to the market.
• Traditional Economy: Economic model driven by habit, customs, or rituals that dictate production and consumption.
• Key Economic Questions: What should be produced? How should it be produced? Who will consume it?

Market Dynamics

• Market: Any system through which buyers and sellers can engage in the exchange of goods and services.
• Specialization: Focus of productive efforts on a limited range of activities to enhance efficiency.
• Free Market Economy: Economic decisions are guided by voluntary exchanges in markets.

Economic Entities

• Household: A person or group living together as a single economic unit.
• Firm: An organization that transforms resources into goods or services for sale.

Market Types

• Factor Market: Venue where firms acquire factors of production from households.
• Product Market: Platform where households purchase goods and services produced by firms.

Motivation and Influence

• Self-Interest: An individual's pursuit of personal gain in economic activities.
• Incentive: Motivators such as rewards or penalties that influence behavior.
• Competition: The rivalry among producers to attract consumer spending.

Economic Theories and Models

• Invisible Hand: Adam Smith’s concept that describes how individual self-interest indirectly benefits society.
• Consumer Sovereignty: Consumer power to influence production decisions through their purchasing choices.
• Centrally Planned Economy: Economic system where government, not individuals, dictates production and distribution.

Economic Systems: Socialism vs. Communism

• Command Economy: A system opposing free-market principles, with centralized decision-making.
• Socialism: Economic and political framework advocating for wealth distribution across society.
• Communism: A system where the government fully owns and controls resources and economic decisions.

Government and Economics

• Authoritarianism: Governments that restrict individual freedoms and demand strict compliance.
• Laissez-Faire: Economic philosophy favoring minimal governmental intervention in the marketplace.

Property and Economic Structures

• Private Property: Ownership of assets by individuals or corporations, not the government.
• Mixed Economy: An economic framework combining free market principles with some government intervention.
• Economic Transition: The shift from one economic system to another, often involving significant change.
• Privatization: Selling government-owned enterprises to private investors to encourage competition.

Enterprise and Ownership

• Free Enterprise System: An economy characterized by personal or corporate ownership of capital goods, emphasizing market freedom.