a set of institutional arrangements and a coordinating mechanism to respond to the economizing problem. The economic system differs 2 ways: who owns the factos of production, and the method used to motivate, cordinate and direct economic activity
aka socialism or communism. Government owns most property resources and economic decision making occurs through a central economic plan.
polar oppoosite is command system. System is private ownership of resources and use of markets and prices to coordinate and direct economic activity.
Pure capitalism or laissez-faire capitalism
govts role limites and would be protecting prive property and establishing an enviroment for the operation of the market system.
What are characteristics of the market system?
Private property, freedom of enterprise and choice, self interest, competition, market prices, technology and capital goods, specialization, use of money, active but limited govt.
individuals or firms own in market system. Ability to own, and negotiate binding legal agreements. Also extends to intellectual rights, patents, copyrights and trademarks.
Freedome of enterprise and choice
enterprise: ensure entrepreneurs and private businesses are free to use economic resources Choice: employ and dispose of their property as they see fit
freedom of choice in pursuit of a monetary return. when there are many buyers and sellers in a market no one can dictate the price of the product or resource because others can undercut that price. Allows for adjustment in tastes, technology and resource ability
Markets and Prices
bring supply and demand into one place. Those who respond to market signals and those who choose to ignore market signals and ignore market dictates are penalized.
Technology and capital goods
oppurtunity and motivation for technological advance.
is the use of resources of an individual, firm, region, or nation to produce one or a few goods or services rathere than the entire range of goods and services
Division of labor
Human specialization contributes to output in several ways: Specialization makes use of differeences in ability, Specialization fosters learning by doing, Specialization saves time
Florida growing oranges and nebraska and wheat and the two areas swap or there might be a surplus/
Use of money
medium of exchange/ exchange can occur through barter, swapping goods for goods. Causes problems because it requires a coincidence of wants between a buyer and seller
Active but limited government
a market system promotes a high degree of efficiency in the use its resources, it has centerain inherent shortcomings, called market failures/
What are five fundamental questions for the market systems?
What goods and services will be produced? How willthe goods and services be produced? who will get the goods and services? how will the system accommodate change? How will the system promote progress?
What will be produced?
The goods and services produced at a continuing profit will be produced and those produced at a continuting loss will not. Consumer sovereignty. Consumers spend their goods on what they are mot willing and able to buy. Cconsumers are sovereign
How will the goods and services be produced
in combinations and ways that minimize the cost per unit of output. Competition eliminates high costs for producers. economic efficiencies.
Who will get the output?
two ways? willingness and ability to pay market price
How will the system accomodate change?
affecting market prices and profits communicates changes with expansion and extraction in others
How does the system promote progress?
society desires greater output and higher standards of living (great income per person). Technological advance(creative distruction destroys old products that are wedded to old ways), Capital accumulation.
What is the invisible had?
promote the public or social interest. businesses seek to build new and improved products to increase profits.
awakened and guyded by the competitive market system. Competition controlds or guides self-interest society wants.
What are merit emphasis on the market system?
efficiency, incentives (skill aquistition, hard work, innovation, and freedom (without corecion)
What is causing the command system to fail?
The coordination problem (can't coordinate millions of details). THe incentive problem: persistant shortages and surpluses of products arose.
What is the circular flow diagram model?
Resource market, households, product market and businesses.
the place where resources or the services of resource suppliers are bought and sold. Households sell reosurces and business by the them. Households own all worker or entrepreneurs which are resources. They sell their resources to businesses
Define the private and public sector?
private includes households and businesses and public is government
income recievers and the major spenders in the economy
Functional distrubution of income`
apportions amoung wages, rents, interest, and profits. Wages are paid to owners of property resources and profits are paid to the owners of corportations and unicorporated businesses
Advatages of corporations
unique methods of finance, the selling of stocks (equity financing), and bonds (debt financing). Comon stock - shares, corporate bond - bond purchaser lending $ to the corp for future date (interest payments accured). Limited liability to owners (stockholders)
Principle agent problem
the principals are the stockholders who own the corporation and who hire excutives as their agents to run the business on their behalf. interest of the managers and owners dont always coincide.
Providing legal structure
ensures the rights of private ownership, and allows the making and enforcement of contracts. Rules of the game that control relationships amoung businesses and resource suppliers and consumers. impose penelties
. ngle seller controls the industry. By controlling the supply a monoploist can charge a higher than competive price. govt controls through regulation and trusts. Antitrust (antimonolopoly) lawas begining with the Sherman act of
higher wages for the skilled. Govt policies: tranfer payments(welfare, food stamps, unemployment, older), Market intervention: modify the prices that are or would be established by market forces, Taxation: persona income tax to take larger fortions of income between high and low income earners.