Traditional economies traditional economy an economic

D. The Flow of Money and Goods in A Market Society
● circular flow model: a diagram that shows the circular movement of money,
resources, and goods and services among households and producers in
an economy
● household: a person or a group of people living together
● firm: an organization that uses resources to produce and sell goods or services;
a business
● product market : a market in which firms sell goods and services to households
● factor market: a market in which households sell land, labor, and capital to firms
● factor payment : income earned when an individual sells or rents a factor of
production that he or she owns; for example, wages are a factor payment made
to workers in exchange for their labor
● The reason markets work so well is that one person's output always
becomes another person's input
E. Capitalism Gives Rise to Socialism and Communism
● Industrial Revolution: a period of rapid industrial growth and development
during the 1700s and 1800s
● capitalist: an individual investor who accumulates capital, such as
machinery, factories, and railroads
● capitalism: the free market economic system
● socialism: a political and economic philosophy based on collective or
government ownership of a society’s resources and means of production,
with the goal of achieving social and economic equality
● communism: a political and economic system in which all property and
wealth is collectively owned by all members of society; the final stage of
socialism in Marxist theory
● The term capitalism came to be synonymous with the free market
economic system.
● Socialism is a political and economic philosophy that calls for property to
be owned by society as a whole, rather than by individuals, for the equal
benefit of all.
● The final phase of socialism, in the view of Marx and Engels, is
communism , a political and economic system in which all property and
wealth are owned by all members of society.
F. Modern Command Economies: Decision Making by the State
● economic planning: the process by which economic decisions are made or
influenced by central governments rather than by private individuals
● In the Soviet Union, private ownership of property was forbidden. The state
owned the factors of production.