Chapter 2: The market System and Circular Flow Flashcards
3 Fundamental Economic Question
1) What to produce?
2) How to Produce?
3) Who to produce for?
What to produce?
How to decide what goods and services should be produced?
Present and future goods?
How to produce?
How should the goods and services be produced?
How should the production be organized?
Who to produce for?
Who would consume produced goods and services be produced for?
How should society distribute its fruits of production among its members?
Types of Economic Systems
Command vs Market
Who own property resources (land and capital) in a command system?>
The government
Who coordinates economic activity in a command system?
Central Planning committee
Examples of command systems
The soviet union, cuba, north korea, china
Who owns propert resources in a market system?
Private citizens
How is economic activity coordinated and directed?
Through the use of markets and prices
What is Laissez-faire?
pure capitalism where government’s role is limited to protecting private property and establishing an environment appropriate to the operation of the market system
What are mixed economies?
ex. industrial economies
Goods and services are allocated by a combination of free markets, regulations and other forms of collected control
7 Characteristics of the Market System
- Property rights
- Freedom of enterprise and choice
- self-interest
- competition
- markets and prices
- specialization
- active, but limited government
What are private property rights?
Individuals and businesses acquire, control, use and dispose of their property resources as they see fit
What does freedom of enterprise and choice mean?
Entrepreneurs and businesses have the freedom to:
obtain and use resources
produce goods and services of their choice
sell those goods and services in the markets of their choise
What is self-interest?
Each economic unit strives to achieve its own particular goal, which usually requires delivering something of value to others
What is competition?
Diffusion of power within the businesses and households that marke up the economy
Market and prices
through prices signals, society decides what the economy should produce how and for whom
What is specialization?
Use of resources of an individual, a region or a nation to produce one or a few goods and exchange them for other goods/services
Problem with specialization
Requires a coincidence of wants…that where money comes in
What are profits and losses?
The difference between the total revenue a producer receives from the sale of its products and the total cost of producing those products
What are dollar votes?
Consumers spending money on things they want. thus creating demand for that product
2 ways society can distribute goods and services?
1) product market
2) resource market
What is the product market?
Goods and services will be distributed to consumers on the basis of their ability and willingness to pay (and on the amount of income that consumers have)
What is the resource market?
The amount of income consumers have depends on:
quantities of resources they supply
prices of those resources in the resource market
Who thought of the invisible hand and when?
Adam Smith, 1776
What is the invisible hand?
firms seeking to further their own self-interest and operating in a highly competitive market system will simultaneously promote the public or social interest
What determines a business?
Proprietorships, partnerships, and corporations
What determines a household?
1+ person, resource suppliers and spenders
What do households do?
Sell resources
Buy products
What does the product market do?
Businesses sell
Households buy
What do business do?
Buy resources
Sell products
What does the resource market do?
Households sell
Businesses buy
What is the role of government in the circular flow model?
Tax businesses and households
Provide expenditures to both product and resource market
