Objective 5.02 Vocabulary

Term Definition
Economic System The organized way in which a country handles its economic decisions and solves its economic problems.
Traditional Economic System An economic system in which people produce only what they must have in order to exist; all economic decisions are based on habit and tradition.
Command Economic System An economic system in which all or many of the means of production and distribution are owned and controlled by the government.
Communism A command economic system in which the government controls the economic system and does not allow private ownership of the means of production and distribution
Socialism A modified command economic system in which government owns the basic means of production and allows private ownership of businesses as well
Market Economic System Private ownership of property/resources. Profit motive (chance to make money)
Private Enterprise System An economic system in which individuals and groups, rather than government, own or control the means of production– Also known as free market economy, private profit system, market system, capitalistic system, or free enterprise system.
Profit Monetary reward a business owner receives for taking the risk involved in investing in a business; income left once all expenses are paid.
Profit Motive The desire to make a profit which moves people to invest in business
Income The money received by resource owners and by producers for supplying goods and services to customers
Expenses Money spent or cost incurred in an organization's efforts to generate revenue, representing the cost of doing business.
Cost Of Goods The amount of money a business pays for the products it sells or for the raw materials from which it produces goods to sell; the amount of money a business pays for the products (or for any part of the products) it sells.
Operating Expenses All of the expenses involved in running a business
Gross Profit This is the difference between sales income and the direct costs of making those products. Gross profit is used as a performance indicator to help the business make decisions over its pricing policies and use of materials.
Net Profit Net profit represents gross profit less all expenses associated with the normal running of the business. Net profit shows how well the business performs under its normal trading circumstances.
Risk The possibility of a financial loss.
Risk Management The process of managing a business’s exposure to risk in order to achieve business objectives.
Business Risk The possibility of loss (failure) or gain (success) inherent in conducting business
Pure Risks The possibility of loss to a business without any possibility of gain.
Economic Risks Risks that result from changes in overall business conditions.
Natural Risks Perils resulting from environmental causes.
Human Risks Perils caused by human errors as well as the unpredictability of customers, employees, or the work environment.
Speculative Risks Chances of loss that may result in loss, no change, or gain.
Guarantees A promise made to the consumer that a product’s purchase price will be refunded if the product is not satisfactory
Warranties A promise made by the seller to the customer that the seller will repair or replace a product that does not perform as expected. A promise to the purchaser that a product will be repaired or replaced if it proves to be defective
Control Risks a risk that cannot be avoided can be prevented or controlled. When businesses identify a risk they face, they often take measures to prevent or reduce that risk.
Retain Risks Self-insurance against business loss.
Transfer Risks Certain risks may be reduced or eliminated by transferring (or shifting) those risks to another person or business.
Property insurance Covers the loss of physical property (cash, inventory, vehicles, buildings)
Real property Buildings, land, and fixtures
Personal property Vehicles, clothing, furniture, jewelry.
Business interruption insurance Makes up for lost income if a business is shut down for repairs or rebuilding
Casualty insurance Protects a business from lawsuits.
Errors-and-omissions insurance Protects businesses from lawsuits resulting from mistakes in advertising
Product liability insurance Protects manufacturers from claims for injuries that result from using their products
Fidelity bonds Protect companies from employee theft
Performance bonds Protect a business if work is not finished on time or as agreed.
Workers’ Compensation A government-regulated program government-regulated program that provides medical benefits and income to employees who are injured on the job.
Emergency planning Businesses must have procedures in place before a crisis occurs.
Avoid Risks Sometimes, the best way to handle a risk is to simply avoid it. This is the first and best way for a business to stay out of trouble.
Competition The rivalry among two or more businesses to attract scarce customer dollars
Direct Competition Rivalry between or among businesses that offer similar types of goods or services.
Indirect Competition Rivalry between or among businesses that offer dissimilar goods or services.
Oligopoly A market structure in which there are relatively few sellers, and industry leaders usually determine prices.
Demand Curve Facing competition or in tacit collusion, oligopolies believe that rivals will match any price cuts and not follow their price rise.
Monopoly A type of market structure in which a market is controlled by one supplier, and there are no substitute goods or services readily available.
Regulated Monopolies Monopoly that the government allows to exist legally.
Perfect Competition A market structure in which there are many businesses selling a lot of identical products for about the same price to many buyers
Price Competition A type of rivalry between or among businesses that focuses on the use of price to attract scarce customer dollars.
Non Price Competition A type of rivalry between or among businesses that involves factors other than price
Price discrimination is selling a good or service at a number of different prices, and the price differences is not justified by the cost differences.
The Sherman Act outlaws "every contract, combination, or conspiracy in restraint of trade," and any "monopolization, attempted monopolization, or conspiracy or combination to monopolize."
The Clayton Act addresses specific practices such as mergers and interlocking directorates (that is, the same person making business decisions for competing companies)
The Federal Trade Commission Act bans "unfair methods of competition" and "unfair or deceptive acts or practices."
Freedom of Choice The key ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete in markets, and protection of person and property.
Private Property is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals.
Profit Taxation policy affects business costs.

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