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Economics Chapter 4


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Define private property.
the right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
Define freedom of enterprise.
the freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.
Define freedom of choice.
the freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.
Define self-interest.
that which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
Define competition.
the presence in a market of independent buyers and sellers competing with one another and the freedom of buyers and sellers to enter and leave the market.
Define roundabout production.
the construction and use of capital to aid in the production of consumer goods.
Define specialization.
the use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services.
Define division of labor.
the seperation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
Define medium of exchange.
any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
Define money.
any item that is generally acceptable to sellers in exchange for goods and services.
What are the Four Fundamental Questions?
the four questions that every economy must answer: what to produce, how to produce it, how to divide the total output, and how to ensure economic flexibility.
Define economic costs.
a payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.
Define normal profit.
the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.
Define economic profit.
the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above-normal profit."
Define expanding industry.
an industry whose firms earn economic profits and for which an increase in output occurs as new firms enter the industry.
Define declining industry.
an industry in which economic profits are negative (losses are incurred) and that will, therefore, decrease its output as firms leave it.
Define consumer sovreignty.
determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers' direction of production through their dollar votes.
Define dollar votes.
the "votes" that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets.
Define derived demand.
the demand for a resource that depends on the demand for the products it helps to produce.
Define the guiding function of prices.
the ability of price changes to bring about changes in the quantities of products and resources demanded and supplied.
Define creative destruction.
the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies.
Define invisible hand.
the tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interest of society.

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