Economic Systems

Unit 2 (Chapters 2 and 3) Copy down each of the assigned vocabulary words and

definitions. Then leave 5-7 line spaces underneath the word and definition during class lecture today.

Provide a well thought out, thorough, reasonable, and logical real life example of the vocabulary term. You can use yourself as the subject in the example, or make-up a fictional, descriptive scenario that shows me you understand the meaning of the word. 3pts each Draw or provide an image of each vocabulary term 3pts each

1.) Economic system: Def: The collection of institutions, laws, activities, values, and

motivations that collectively provide a framework for the method used by a society to produce and distribute goods and services.

The assorted institutions that society uses to answer the three basic questions of allocation and address the fundamental problem of scarcity

Another, more popular term for economic system is economy. An economy, or economic system, is the structural framework in which

households, businesses, and governments undertake the production and consumption decisions that allocate limited resources to satisfy unlimited wants and needs.

Your examples:

2.) Standard of living Def: A level of material

comfort as measured by the goods, services, and luxuries available to an individual, group, or nation.

In principle, an economy's ability to produce the goods and services that consumers use to satisfy their wants and needs.

In practice, it is the average real gross domestic product per person--usually given the name per capita real GDP.

Your example:

3.) Traditional Economy

Def: A family or community based economic system that relies on habit, customs, and rituals to decide its choices (to decide question of production and consumption of goods and services)

Where people grow their own food and make their own goods

Aborigines Amazon tribes Your examples:

4.) Market economy:

Def: Individual or consumer based economic system in which decisions on production and consumption of goods/services are based on voluntary exchange in markets.

An economy in which markets answer all allocation decisions and answers all three questions of allocation. There is no government. Markets do it all.

Economy with private ownership, free trade, and competition

Prices determined by supply and demand Your example:

5.) Command economy or centrally planned economy

Def: an economic system in which the central government makes all the decisions on the production and distribution of goods/services.

The production of goods and services is undertaken by state-owned enterprises.

Central government makes all economic decisions

Decides what goods to produce and prices

Any communist country or dictatorship

Your examples:

6.) Mixed Economy: Def: A market-based economic system with

limited government involvement. Most modern economics While, in theory, we could have a pure market

economy or a pure command economy, in the real world all economies are mixed, relying on both markets and governments for allocation decisions.

Markets allocate resources through voluntary choices made by living, breathing people.

Government forces allocation through involuntary taxes, laws, restrictions, and regulations. Both institutions play vital roles in an economy.

Your examples:

7.) market Def: A setting where buyers and sellers establish

prices for identical or very similar products, and exchange goods and/or services. 

Your example :

8.) incentive Def: A cost or benefit that motivates a decision or action by

consumers, businesses, or other participants in the economy The key to understanding human behavior lies in identifying incentives. Incentives are rewards or punishments that influence people’s actions When incentives change, people’s behavior changes in predictable

ways. Some incentives are explicitly created by government policies to

achieve a desired end or they can just be part of the wacky world we call economics.

The most noted incentive in the study of economics is that provided by prices.

When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more.

When prices are lower buyers have the "incentive" to buy more and sellers have the "incentive" to sell less.

Price incentives play a fundamental role in the allocation Your example:

9.) invisible hand Def: the term economists use to describe the self-regulating nature of the

marketplace. Adam SMITH's shorthand for the ability of the free market to allocate FACTORS

OF PRODUCTION, goods and SERVICES to their most valuable use. If everybody acts from self-interest, spurred on by the PROFIT motive, then the

economy will work more efficiently, and more productively, than it would do were economic activity directed instead by some sort of central planner.

It is, wrote Smith, as if an 'invisible hand' guides the actions of individuals to combine for the common good.

Smith recognized that some GOVERNMENT action might be needed, such as to impose ANTITRUST laws, enforce PROPERTY RIGHTS, and to provide policing and national defense.

Your example:

10.) Socialism: Def: a system of social organization in which the means

of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy.

In theory, an economy that is a transition between capitalism and communism. It is based on—

(1) government, rather than individual, ownership of resources,

(2) worker control of the government, such that workers, rather than capitalist, control capital and other productive resources,

(3) income allocated on need rather than on resource ownership or contribution to production (using the needs standard rather than the contributive standard).

Your example:

11.) Communism A system of government in which the state plans and controls

the economy and a single, often authoritarian party holds power, claiming to make progress toward a higher social order in which all goods are equally shared by the people.

In theory, an economy based on -- (1) a classless society, where everyone does their best to contribute to the common good,

(2) a common, rather than individual, ownership of all resources, (3) the complete disappearance of government, and (4) income allocated based entirely on need rather than on resource

ownership or contribution to production (that is, a needs standard) Your example:

12.) authoritarian Def: enforcing strict obedience to authority, esp.

that of the government, at the expense of personal freedom.

Your examples:

13.) Laissez Faire: Def: Let-it-be economics: the belief that an

economy functions best when there is no interference by government

A French term that translates into "leave us alone." It has become the rallying cry for many business leaders

of the second estate who oppose government intervention, regulation, or even taxation.

It's based on the belief that markets alone can achieve an efficient allocation of our resources. This laissez faire philosophy should be contrasted directly with the philosophy of paternalism, which essentially says "Government needs to care for you because you can't care for yourself."

Your example:

14.) free enterprise: Def: an economic system in which private

business operates in competition and largely free of state control.

An economy in which businesses and consumers are "free" to engage their resources in any desired production, consumption, or exchange without government restriction, regulation, or control.

Your example:

15.) privatize Def: Selling state-owned businesses to private

investors The process of converting or "selling off"

government-owned assets, properties, or production activities to private ownership.

Your example

16.) voluntary exchange:

Def: The free and willing exchange of goods and services between buyers and sellers in some sort of marketplace.

The process of willingly trading one item for another.

The emphasis here is on "willingly.“ Voluntary exchanges are the heart and soul

of market transactions, and should be contrasted with the "involuntary" exchanges mandated by government taxes, laws, and regulations.

While involuntary government-forced exchanges play an important role in a mixed economy, economists really, really like voluntary market exchanges because they promote economic efficiency.

Your example:

17.) profit motive: Def: The force that encourages people and

organization to improve their material well-being In a free enterprise system, business owners make

choices themselves (without control of the government), operating in ways they believe will maximize their profits

Forces management to exercise financial discipline because it makes people economically responsible for their own success or failure

It rewards innovation by letting creative companies grow It improves productivity by allowing more efficient

companies to make more money. Your example:

18.) private property rights:

Def: the concept that people have the right and privilege to control their possessions as they wish

Private property provides critical incentives for the efficient operation of competitive market and a market-oriented economy.

Under private-property ownership, control over resources is relinquished (that is sold) when the owners are compensated for their opportunity costs.

And this is just the sort of thing that leads to an efficient use of resources.

Your example:

19.) special interest group:

def: an organization that tries to persuade public officials to act or vote according to group members'’ interests.

Special interest groups are groups of people that set out to change the opinions of politicians. Sometimes Corporations will work with these kinds of groups or lobbyist as they are also known to try and sway the public officials to vote in the way they want.

Some special interest groups can be fairly tame, merely voting in elections for their chosen candidate, while others are quite active.

The more active ones form political action committees and undertake all forms of lobbying (legal and illegal).

Examples:

20.) macroeconomics:

Def: the study of the behavior and decision making of entire economies

The big picture: analyzing economy-wide phenomena such as GROWTH, INFLATION and UNEMPLOYMENT.

Contrast with MICROECONOMICS, the study of the behavior of individual markets, workers, households and firms.

Macroeconomics is the product of all the microeconomic activity in an economy.

The precise relationship between macro and micro is not particularly well understood, which has often made it difficult for a government to deliver well-run macroeconomic policy

Your examples:

21.) microeconomics:

Def: The study of the economic behavior and decision making of small units, such as individuals, families, and businesses.

The branch of economics that studies the parts of the economy such as markets, prices, industries, demand, and supply.

It can be thought of as the study of the economic trees, as compared to macroeconomics, which is study of the entire economic forest.

  considers issues such as how households reach decisions about CONSUMPTION and SAVING, how FIRMS set a PRICE for their OUTPUT, whether PRIVATISATION improves EFFICIENCY whether a particular market has enough COMPETITION in it and how the market for LABOUR works.

Your examples:

22.) GDP: gross domestic product:

Def: the total value of all final goods and services produced in a particular economy (country) during a given period of time, usually a year.

This is the government's official measure of how much output our economy produces.

It is calculated by adding the total value of a country's annual output of goods and services. GDP = private consumption + investment + public spending + the change in inventories + (exports - imports). It is usually valued at market prices; by subtracting indirect tax and adding any government subsidy,

Your example:

23.) public good: Def: a shared good or service for

which it would be impractical to make consumers pay individually and to exclude nonpayers

Goods that are difficult to keep nonpayers from consuming (excludability), and use of the goods by one person doesn't prevent use by others (rival consumption).

Examples include national defense, a clean environment, and any fourth of July fireworks display.

Your examples:

24.) positive externality:

Def: An economic side effect of a good or service that generates benefits to many people, not just those who pay for the goods

Ex. #1) Ms. Morse buys an old house that is an eyesore on Oak Street. She paints the house, cuts the grass, and plants flowers.

Her neighbors were not involved in her economic decision. But, they receive benefits from it, such as higher property value and a better view.

Ex. #2.) Morse’s Computer Company hires underprivileged teenagers and trains them to be computer programmers.

Those workers are then available to be hired by other companies, who benefit from the workers’ skills without having paid for them

Your example:

25.) negative externalities:

An economic side effect of a good or service that generates unintended costs

Negative externalities cause part of the cost of producing a good or service to be paid for by someone other than the producer.

Ex. 1) You next-door neighbor, Ms. Morse, takes up the accordion and holds Friday nigh polka parties in her backyard. Unfortunately, you hate my polka music.

Ex. 2) A paper mill dumps chemical wasters into a nearby river, making it unsafe for swimming.

The downstream town of Fort Bragg is forced to install special equipment at its water treatment plant to clean up the mess.

If the treatment cost is $20 per ton of paper produced and the mill’s production cost is $100, the full, or social cost of a ton of paper is $120.

The community, not polluter, winds up paying that $20. Your example: