Module 6 Glossary
Term
Definition
Circular Flow Diagram
The flow of resources between four main players in the economy—households,
businesses, the government, and the rest of the world. The four main players interact in
three types of markets —factor, product, and financial.
Circular Flow Diagram Businesses
Includes any company type that earns income from the sale of goods and services.
Example: They grow, harvest, prepare cherries for pies.
Circular Flow Diagram Factor market
The exchange of the factors of production including components of land, labor, and
capital, such as a coffee company purchasing equipment to process coffee beans.
Circular Flow Diagram Financial market
Refers to the stock market and banking services, including the loans to all the other
economic players use to meet their goals. Example: Loaning money for a new coffee
grinder factory to be built.
Circular Flow Diagram Government
Represents any lawmaking body (local, state, or national) that collects taxes and provides
services to individuals and businesses. Example: Sets standards for food safety, taxes for
production of cherry pies.
Circular Flow Diagram Households
Include individuals like you and those living in the same home. Example: You and your
mom purchase cherry pies.
Circular Flow Diagram Product market
The buying and selling of finished goods and services. Example: buying a morning latte.
Circular Flow Diagram Rest of the world
Represents interaction with all those three groups in foreign countries. Example: Export
cherry pies to international consumers.
Common Good
A common good is property that everyone owns equally, such as tax-supported land or
structures like public parks, schools, or beaches. Everyone helps pay for common goods
through taxes and has equal opportunity to use them.
Eminent domain
Power of a government to pay for and take a person’s property for an alternative use
without consent.
Externalities
Costs or benefits to third parties. “Third-party,” or “third parties,” describes people who
did not make the initial choice that created the externality. Externalities may be positive or
negative depending on how they affect other people. Externalities result from the freerider problem, the use of common goods, and the use of free resources.
Free Resources
One impact of externalities is on the use of free resources. Free resources refer to
productive ingredients that exist in quantities greater than people need or want for
production. However, this does not mean they are unlimited or not valuable.
Free Rider
The free-rider problem refers to how people can benefit from a good without necessarily
paying for the costs of that good.
Incentive
A cost or benefit that encourages a person to make a choice or take action.
Negative Externalities
Undesirable and unwelcome effects on third parties. Example: People flush old
prescription medications, contaminating the drinking water.
Positive Externalities
Desirable and welcome effects on third parties. Example: Students clean up beach litter
that attracts more tourists. More tourists buy goods and services boosting the local
economy.
Steps in a rational
decision making model
1: Define the situation or problem. 2: Identify the important criteria for solution
evaluation. 3: Consider all possible solutions or alternatives. 4: Calculate the consequences
of these solutions versus satisfying the criteria. 5: Choose the best option.