Unit 2 – Key Terms & Definitions
I. Economics is the study of how individuals and societies seek to satisfy needs and
wants through incentives, choices, and allocation of scarce resources.
A. Resources (natural, human, capital, and entrepreneurial) are limited—scarcity
B. Economic systems provide a way to allocate scarce resources to satisfy needs
and wants
C. Four basic economic systems—traditional, free enterprise, command, mixed
II. Traditional Economy (2.01)
A. Primarily found in rural, non-developed countries
B. Examples of traditional economy:
1. Amish
2. Indian Tribes
3. Vanuatu (southwestern Pacific Ocean island)
4. Pygmies of Congo
5. Eskimos
6. Belarus
C. Economic decisions are based on customs and centered around family
1. The way it has always been
2. Agrarian economy; hunting and gathering culture
3. Concerned with subsistence and basic survival
4. Men and women have specific roles
III. Free Enterprise System or Market Economy (2.01)
A. No central coordinator but the economic system self-regulates itself based on the
following:
1. Supply and demand of goods and services determines the price.
2. Prices are set by supply and demand and determine what is produced.
Products, thus, generate competition within the market.
3. No governmental intervention or other central coordinator.
B. Note: There is no true market economy. Most economic systems are a
combination of market and command economies—mixed economies (Part IV).
C. Advantage – Producers strive to create the best goods and services on the
market to eliminate competition and become a monopoly.
D. Disadvantage – An economic system like this could promote illegal business
practices. This system could create a huge rift between the wealthy and the
poor.
IV. Command Economy (2.01)
A. Government controls or dictates what is produced.
B. Also known as planned or managed economy
C. Command economies can vary from a strong command like China or Cuba to a
moderate command like France or Sweden.
D. Advantage – Equal standard of living for everyone because the government
oversees and distributes the necessities of life such as healthcare, national
security, social reforms and school systems.
E. Disadvantage –Fewer choices in the marketplace because government controls
who enters. Less competition in the market, therefore some items are
unavailable.
V. Mixed Economy (2.01)
A. Mix of command and market economy
B. Government takes care of people’s needs while the market takes care of their
wants.
C. Most nations have a mixed economy – e.g. England, United States, Australia
D. A mix of private and public sectors
E. Advantages—private economic freedom; centralized economic planning;
freedom to buy, sell and possess; government provided services for public good;
governmental safeguards
F. Disadvantages—taxes must be paid for government services, governmental
restrictions (legislation and regulations)
VI. In a free market, consumers determine the demand for a product. (2.02)
A. Entrepreneurs see the demand and make more of the product, increasing the
supply.
B. Increased supply causes the price to decrease as the demand is fulfilled.
C. If there is a limited supply, the price will increase. An example is the current
price of gas, related to the shortage of petroleum world-wide.
VII. Supply and demand determine the price of goods & services. (2.02)
A. Supply – how much of a good or service that is available at different prices
B. Demand – the desire to own something and the ability to pay for it
C. Supply and demand graphs can be used to see the relationship between the
supply and the demand.
1. A supply and demand graph is a visual representation of supply and
demand.
2. The graph shows changes in a product's demand or supply.
3. The graph can help predict the performance of the product over time.
4. The market or equilibrium price (the point at which the supply and
demand curve meet) can be read easily from the supply and demand graph.
VIII. Prices tell businesses what to produce. (2.02)
A. If the price is set too low and people are buying goods and services then the
demand rises and the price will rise too.
B. Conversely, if the price is set too high and people are not buying goods and
services, then the demand falls, and the price will fall too.
IX. Supply and demand spark competition (2.02)
A. Competition comes into the market as sellers compete to make a profit.
B. If a person notices that they can meet a need or want, then they enter the market
and compete with those already selling or they offer a new product and the
competition will follow.
X. Profit Motive – Businesses and people enter the market in hopes of making money
(earning a profit). (2.02)
XI. The Federal Reserve (2.03)
A. Central bank of the United States
B. Regulates money supply
C. Fixes the discount rate (the rate at which member banks may borrow short term
funds directly from a Federal Reserve bank), which affects interest rates for
consumers
1. Raising the discount rate causes consumers to buy fewer large goods such
as refrigerators, boats, etc.
2. Lowering the discount rate causes consumers to want to buy more expensive
goods such as cars, washing machines, etc.
XII. Stock Market (2.03)
A. Where shares of stocks (shares of ownership in corporations) and other
securities (such as bonds and futures) are bought and sold (or traded)—not
necessarily a “place” with the prevalence of electronic transactions
B. Stock exchange—physical location where stocks are listed and bought and sold
(or traded)
1. New York Stock Exchange (NYSE)
2. American Stock Exchange
3. NASDAQ—virtual exchange
C. Bull market
1. Stock prices are going up.
2. Consumers are optimistic and buy stock in anticipation of gains.
3. High trading volume of stocks
4. Dealers are more likely to buy than to sell stock.
D. Bear market
1. Stock prices are going down or falling.
2. Consumers are pessimistic and reluctant to buy stock for fear of losing
money.
3. Investors are motivated to sell stock so they won’t lose more money.
4. Most famous bear market was the Great Depression of 1930s.
XIII. e-Commerce (2.03)
A. Buying and selling of goods and services on the Internet
B. Also called electronic commerce, e-business
C. Consumers enjoy a great deal of variety in goods available and accessibility to
goods as a result of e-commerce.
1. Goods and services are available from throughout the U.S. and the world via
the Internet.
2. Consumers can comparison shop and purchase goods from the comfort of
their own home.
3. Goods and services are available 24 hours a day, seven days a week (24/7).
D. Much market research can be conducted by e-businesses from information
gained through e-commerce transactions.
E. This multibillion dollar industry has caused a re-tooling of American businesses.
1. Less need for sales persons in stores
2. More need for just-in-time delivery of goods ordered
3. Web presence for business is necessary (company must have a website)
4. Need for payment methods other than cash
5. Need for high level of customer privacy, reliability, and security
6. Instantaneous response time for customers
XIV.
United States economy is a mixed economy—combination of free enterprise
and command economies. (2.04)
XV. Free enterprise or market economy (2.04)
A. Six major characteristics
1. Private property ownership
2. Freedom of enterprise and choice
3. Motive of self-interest
4. Competition
5. System of markets and prices
6. The market addresses consumer wants
B. Advantages
1. Individuals can own businesses and resources
2. Individuals can buy and sell goods and services
3. Competition in the market leads to greater choices
4. Consumers play a great role in the economy
C. Disadvantage—the critical role of the consumer in the market can create a
tremendous divide between the poor and the wealthy.
XVI. Command economy (2.04)
A. There is limited government intervention through regulatory agencies.
1. FDA—protects the safety of foods and drugs sold in the marketplace
2. OSHA—protects the safety of workers in the workplace
B. Government provides some services to take care of people’s needs.
1. Highways (Interstate highway system)
2. Public education, including such programs as CTE and Title I
3. Social Security, Medicare, etc.
4. Defense and public safety
C. Advantages
1. Consumers have some degree of protection in the marketplace.
2. Essential services are provided for citizens.
D. Disadvantages
1. Citizens have to pay taxes so the government can provide services.
2. Some businesspeople and consumers think there is too much government
control in the marketplace.