Glossary for Vocabulary Terms

Glossary for Vocabulary Terms
CE.9 - Economic Decisions and the Marketplace

capital - money, equipment, tools, and buildings used by a business to produce goods and services.

capitalism - the basic economic system in the U.S. and most modern industrial nations, it is also called the free market system. It this system, individuals own businesses, and have freedom to choose how to spend, buy, sell, or invest without undue government interference. Business decisions are normally based on what will bring the highest profit, and businesses compete freely with other businesses. Since consumers have freedom to decide what to buy, this means that businesses normally produce good products that consumers desire at affordable prices.

choice - in economics, selecting the best item or action after examining all the possible alternative actions.

command economy - an economy in which the government makes the decisions about what will be produced, how it will be produced, and who will get the products. Example: communist countries.

communism - an economic and political system in which the government owns the businesses, farms, and natural resources. Government agencies decide what businesses will make, how to make it, and who will get the products. Prices are set by the government as well. The system of communism, therefore, is a command economy.

competition - sellers all try to attract buyers away from other sellers by producing better products at lower prices.

consumer sovereignty - in a free market system, the principle that "the consumer is king." That is, sellers will normally try to produce what buyers (consumers) want.

consumption - the act of buying and using a product. Consumer preferences and price determine what is purchased by people.

demand - in economics, demand refers to the amount of a product or service that will be purchased by buyers at all possible prices. It is often represented as a table or graph showing the relationship between various prices and the quantity that will be purchased at those prices by buyers.
   The “law of demand” states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises.

free market system - the basic economic system in the U.S. and most modern industrial nations, it is also called capitalism or the capitalist system. It this system, individuals own businesses, and have freedom to choose how to spend, buy, sell, or invest without undue government interference. Business decisions are normally based on what will bring the highest profit, and businesses compete freely with other businesses. Since consumers have freedom to decide what to buy, this means that businesses normally produce good products that consumers desire at affordable prices.

incentives - anything that motivates or encourages an individual or business to do something. In a free market system, profit is the incentive that motivates businesses to make better products at lower prices.

mixed economy - an economy that is a mix of the free market system with some government influence. The U.S. economy is best described as a mixed economy in which the free market system (capitalism) is the largest part, but the government also plays a role in making some economic decisions.

opportunity cost - in any economic decision, the cost of the "next best alternative" that was given up. Example: If you decide your best choice is attending college to increase your future earning power, the opportunity cost is the full time job you could take instead during those same years. Before making any decision, it is important to consider the opportunity cost.

price - the amount of money exchanged for a good or service. In a free market system, prices are determined by the interaction of supply and demand. In a command economy, prices are set by the government.

private property - anything owned and controlled by an individual, a group of individuals, or a business.

production - the act of turning resources into goods and services that can be offered for sale. In a free market system, the resources available to a society, together with consumer preferences, determine what is produced.

profit - the money earned by a business above its expenses. To make it a formula or equation, we can write: profit = income minus costs.

resources - anything used to produce goods and services. These can be natural resources, like aluminum or wood. Resources can also include capital goods (tools and equipment), human resources (labor), and entrepreneurship (the ability needed to start a new business.) Sometimes resources are referred to as "factors of production."

scarcity - the principle that there is never enough of everything to satisfy the total of what everyone wants. Resources and goods are limited, not infinite. Therefore, businesses and individuals must make economic decisions about what they want or need most, and what they are willing to give up.

supply - in economics, supply refers to the amount of a product or service sellers are willing to sell at all possible prices. It is often represented by a table or graph showing the relationship between various prices and the quantity that will be offered by sellers at those prices.
   The “law of supply” states that when the price of a good rises, the amount supplied (that is, the amount offered for sale by sellers) will also rise, and when the price falls, the amount supplied will also fall.

supply and demand - the principle that in a free market system, price is determined by the balance between the amount of a product offered for sale (supply) and how much of that product consumers want to buy (demand). Put more simply, the interaction of supply and demand determines price.