economics 2-3, chapter 3

private property rights

the rights of individuals and groups to own property


any place or situation in which people buy and sell resources and goods and services

laissez faire

the principle that the government should not interfere in the economy


an economic system that is based on private ownership of the factors of production

voluntary exchange

a trade in which the parties involved anticipate that the benefits will outweigh the cost


a financial gain from a business transaction; the money left over after the costs of producing a product are subtracted from the revenue gained by selling that product


the effort of two or more people, acting independently, to get the business of others by offering the best deal

consumer sovereignty

the idea that because consumers are free to purchase what they want and to refuse products they do not want, they have the ultimate control over what is produced


a situation in which people concentrate their efforts in the areas in which they have an advantage

circular flow model

visualizes how all interactions occur in a market economy

product market

a market in which goods and services are bought and sold

factor market

the market for the factors of production- land, labor, capital, and entrepreneurship

free enterprise system

another name for capitalism, an economic system based on private ownership of productive resources

open opportunity

the ability of everyone to enter and compete in the marketplace of his or her own free choice

legal equality

a situation in which everyone has the same economic rights under the law

free contract

a situation in which people decide which legal agreements to enter into

profit motive

the force that encourages people and organizations to improve their material well being from economic activities

modified free enterprise economy

a free enterprise economic system with some government involvement

market failure

occurs when people who are not part of a marketplace interaction benefit from it or pay part of its cost

public goods

goods and services that are provided by the government and consumed by the public as a group

free rider

a person who chooses not to pay for a good or service but who benefits from it when it is provided


the goods and services that are necessary for the smooth functioning of society, such as highways; mass transit; power, water, and sewer systmes


a side effect of a transaction that affeccts someone other than the producer or the buyer

negative externality

an externality that s a negative effect, or cost, for people who were not involved in the original economic activity (pollution caused by factories)

positive externality

an externality that is a positive effect, or benefit, for people who were not involved in the original economic activity (neighbor planting pretty flowers)


a government payment that helps cover the cost of an economic activity that has the potential to benefit the public as a whole

safety net

government programs designed to protect people from economic hardships

transfer payments

transfers of income from one person or group to another even though the receiver does not provide anything in return

public transfer payment

a payment in which the government transfers income from taxpayers to recipients who do not provide anything in return