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Economic system

A nation's plan for answering the key economic questions

Custom-based economy

An economy in which goods are produced the way they always have been produced

Directed or planned economy

An economy in which the resources are owned and controlled by the government

Market economy

An economy in which individuals are free to engage in business transactions with buyers who are willing and able to buy and sellers who supply goods and services from which they profit


Any place where buyers and sellers exchange goods and services for some form of money

Capitalism (free or private enterprise system)

An economic system in which most economic resources are privately owned and decisions are largely made by free exchange in the marketplace

Free-private enterprise system

An economic system in which most economic resources are privately owned and decisions are largely made by free exchange in the marketplace

Private property

The right to own, use or dispose of things of value


Money left from sales after subtracting the cost of operating the business

Profit motive

The desire to work hard and be creative to earn a higher profit


The rivalry among businesses to sell their goods and services to buyers

Labor/worker productivity

The quantity of a good an average worker produces in one hour

Standard of living

A measure of how well people in a country live; the quality and quantity of wants and needs that are satisfied

Public goods

Things that are needed and provided by a community and are equally accessible to everyone

Gross domestic product (GDP)

The total value of all final goods and services produced in a country in one year

Base year

The year chosen to compare an item, such as price, to the same item in another year

GDP per capita

The GDP divided by the total population of a country

Business cycle

The movement of an economy form one condition to another and back again


A phase of the business cycle when most people who want to work are working and businesses produce goods and services in record numbers


A period where demand begins to decrease, businesses lower production of goods and services, unemployment begins to rise, and GDP growth slows for several quarters


A phase marked by high unemployment, weak sales of goods and services, and business failures


A phase of the business cycle in which unemployment begins to decrease, demand for goods and services increases and GDP begin to rise again


An increase in the general price level


A decrease in the general price level

Law of Diminishing Returns

The tendency for a continuing application of effort or skill toward a particular project or goal to decline in effectiveness after a certain level of result has been achieved

Economies of Scale

Reduced cost of production per unit as the number of units produced increases

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