Private property- private ownership of capital Freedom of enterprise- entrepreneurs and private businesses are free to obtain and

use economic resources to produce their choice of goods and services and to sell them in their chosen markets Freedom of choice- enables owners to employ or dispose of their property and money as they see fit. Self-interest- each economic unit tries to do what is best for itself Competition- freedom of choice exercised in pursuit of a monetary return. Roundabout production- using indirect methods to produce goods Specialization- specializing in making a certain good Division of labor- human specialization Medium of exchange- what goods and services are traded for Barter- swapping goods for goods Money- a convenient social invention to facilitate exchanges of goods and services Four fundamental questions- produce what, how, for who and how will the system accommodate change. Economic costs- payments that must be made to secure and retain the needed amounts of those resources Normal profit- payment for the entrepreneurs contributions Economic profit- remainder of profit that goes as a reward to entrepreneur Expanding industry- a prosperous industry with above normal profits Declining industry- unprofitable shrinking industry Consumer sovereignty- consumers are in command Dollar votes- consumers register wants through demand side of product market Derived demand- demand for resources derived from demand of goods and services that the resources help produce Guiding function of prices- adjustments to market based on demands Creative destruction- creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business Invisible hand- society benefits when people do things to their benefit Functional distribution of income- how the nations earned income is apportioned among wages, rents, etc. Personal distribution of income- indicates how nations income is divided among individual households Durable goods- products with expected lives of 3 or more years Nondurable goods- products with lives less than 3 years Services- work done for consumers by doctors, lawyers, etc. Plant- physical establishment that performs 1 or more functions in producing anf distributing goods and services Firm- business organization that owns and operates plants. Industry- group of firms that produce the same products Sole proprietorship- business owned and operated by one person Partnership- 2 or more individuals agree to own and operate a business Corporation- legal creation that can acquire resources, own assets, and perform other

enterprise functions Stocks- shares of ownership of a company Bonds- promise to repay a loan Limited liability- personal assets not at stake in a company Double taxation- dividends taxed as corporate profit and stockholders personal income Principal-agent problem- difference in wishes between stockholders and executives Monopoly- single seller controls industry Spillover costs- production/consumption costs inflicted on a third party without compensation Spillover benefits- benefits gotten by third party without having to pay Exclusion principle- people who cant afford a product are excluded from buying it Public goods- indivisible goods Free-rider problem- people receive benefits from a product without having to pay for it Quasi public good- goods that can be produced and delivered in such a way that the exclusion principle would apply Government purchases- products purchased directly absorb resources and are part of domestic output Transfer payments- dont directly absorb resources or create output Personal income tax- tax on incomes of households and unincorporated businesses Marginal tax rate- rate at which tax is paid on each additional unit of taxable income Average tax rate- total tax paid divided by total taxable income Payroll taxes- taxes based on wages and salaries Corporate income tax- tax on corporate income Sales and excise tax- tax on commodities or on purchases Property tax- tax on property Fiscal federalism- system of intergovernmental transfers