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Chapter 2 terms

economic system

the method used by a society to produce and distribute goods and services.

factor payments

income that people get for providing the factors of production. (Landowners get rent, workers receive wages, those who loan get interest.)


having pride in and love for one's country (protecting institutions or serving in the military.)

safety net

set of government programs that protect people that undergo difficult economic times. (Medicare, Medicaid, Worker's Compensation, Unemployment insurance.)

standard of living

level of economic prosperity. (If population increases, so must the amount of jobs and income.)

traditional economy

relies on habit, custom, or ritual to decide what and how to produce, and where it's distributed. (Revolves around family, very rigid.)

market economy

decisions are made based on trading by individuals. (also called free markets, or capitalism.)

centrally planned economy

(also called command economy); the government decides how to answer the three economic questions.

mixed economics

market based economic systems in which government plays a limited role. (mix of both; many countries today are mixed economies.)


arrangement that allows buyers and sellers to exchange things.


the concentration of the productive efforts of individuals and firms on a limited number of activities.( Leads to efficient use of resources, because we are not self sufficient.)


a person/group living in the same residence. (They own factors of production, and are consumers of goods and services.)


organization that uses resources to produce a product, which is then sold.( Firms transform factors of production into products.)

factor market

the arena of exchange when firms purchase factors of production from households. a. (Firms purchase/rent land, hire workers (paying them wages), borrow money to purchase capital, and pay interest in return.)


the financial gain made in a transaction.

product market

the market in which households purchase the goods and services firms produce. (Produces a circular flow, as the money never ends.)


personal gain; (the motivating force in a free market.)


the hope of reward or the fear of punishment that encourages a person to behave in a certain way. (They regulate the market; come in two forms (monetary and nonmonetary); consumers look for lower prices, businesses produce more of what people want.)


the struggle among producers for the dollars of consumers competition.

Invisible Hand

With self-interest and competition, consumers get products they want that closely reflect the cost of producing them.

consumer sovereignty

Consumers decided what gets produced( because produces have incentives to produce what people want.)


social and poltical philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society. (Real equality can only exist when people are equal politically and economically. Socialist countries can be democratic, has varying degrees.)


characterized by a centrally planned economy with all economic and political power resting in the hand of a central government;( dominated by a party or dictator. communist believe that it can only come about after a violent revolution, do not allow for democracy.)


exact strict obedience from their citizens and do not allow indivuals freedom of judgment and action. (Communism is authoritarian.)


large farms leased from state to groups of peasant farmers.( Either got share of production or income.)

heavy industry

requires a large capital investment to produce items used in other industries, such as chemical, steel, and heavy machinery. (favored by the Soviet Union, so consumers were left with things of poor quality.)

laissez faire

the doctrine that government generally should not intervene in the marketplace. (A limited degree of regulation is needed, Adam Smith thought that left to it's own devices, an economy would right itself and raise the standard of living.)

private property

owned by individuals or companies, not by the government or the people as a whole. (Protected by the Constitution.)

free enterprise

an economic system where private/corporate own the goods; (investments are determined privately, rather than by state.)


a range with no clear division. (Shows free market vs centrally planned economy.)


sold to the public


a period of change in which an economy moves away from central planning toward a market bases sytem. (Like China, states must be privatized and allow for competition for this to happen.)

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