Chapter 2 Flashcards
Economic Systems
Are sets of institutionalized arrangements
Coordinating mechanism
Differences in systems exist by-
Degree of decentralized use of markets prices in decision making
Degree of centralized government control
Laissez-Faire Capitalism
Keep the government from interfering.
Power of government needed to:
Protect private property from theft.
Provide a legal environment for contract enforcement.
People interact in markets to buy and sell
The Command System
The command system is know as socialism or. communism
Government ownership of resources
Decisions made by a central planning board
Examples: North Korea, Cuba, Myanmar
The Market System
The market system is a mix of decentralized decision making with some government control .
Systems found in much of the world
Private markets are dominant force
Private ownership of resources
Self-interested behavior
Characteristics of the Market System
Private property
Freedom of enterprise and choice
Self-interest
Competition
Market and prices
Technology and capital goods
Specialization
Use of money
Active, but limited, government
Technology and Capital Goods
Advanced technology and capital goods are encouraged.
Specialization
Division of labor
Geographic specialization
Use of Money
Money makes trade easier
It is medium of exchange
Without money, people would have to barter
Limited, but limited, Government
Government may be needed to alleviate market failures
Government can increase effectiveness of a market system
Possible government failure
The Five Fundamental Questions
WHAT goods and services will be produced?
HOW will the goods and services be produced?
WHO will get the goods and services?
HOW will the system accommodate change?
HOW will the system promote technological progress?
What Will be Produced?
Goods and services that create a profit
Consumer sovereignty
“Dollar votes”
Allow consumers to indicate which goods and services should be produced
Determine which products and industries survive or fail
How Will the Good Be Produced
Minimize the cost per unit by using the most efficient techniques:
Terminology
Prices of the necessary resources
Who Will Get the Output
Consumers with the ability and willingness to pay will get the product
Ability to pay depends on income
How Will the System Accommodate Change?
Changes in consumer tastes
Changes in technology
Changes in resource prices or availability
How Will the System Progress
Technological advance
creative destruction: The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies
Capitalism accumulation
