Exam-1 Chapter 3 Global Economic System Flashcards
What are the basic economic questions?
What to produce?
How to produce?
Who benefits?
Economic system
A method of answering the three questions is called the economic system.
There are two primary economic systems in use today
Capitalism and socialism
No country is hundred percent of either.
A country with the features of both capitalism and socialism is called
Mixed economy
Capitalism requires
Private ownership of capital.
The questions and capitalism are answered by
The use of markets
What is the guiding motivation in capitalism?
Self-interest
Socialism
Socialism relies on the government ownership of capital, planning as the allocation mechanism of markets and social interest motivations
Markets are
Voluntary
Market provide incentives to both
The buyers and sellers because they can gain from exchange
Markets also promote
Efficiency and innovation by businesses trying to maximize their profits
Workers also have an incentive to be efficient
Because their compensation should be based on their production
Decision making in capitalism is
Decentralized
In a planned economy Who makes all the decisions?
Government agency
Why do incentives in planned economies different from those in capitalism
Since the society, not the individual, stands to gain from individual efforts.
Why do markets fail?
Markets failed because of several reasons factors notably public goods , externalities, asymmetric information, and monopoly power.
Public goods
Are nonexclusive a non-rivalrous.
They are under produced by markets because people can free ride.
When do externalities occur?
When a transaction brings cost or benefits to someone other than those directly involved in the transaction.
Name two types of externalities
Externalities can be either positive or negative and can result in either over or under production of a good.
Asymmetric information
Occurs hen either the buyer or seller knows important information about an exchange that the other does not.
Asymmetric information can result in
Goods being wrongly priced or withdrawn from markets
When does monopoly power exist?
Monopoly power exist when markets are insufficiently competitive.
What are the results of monopoly power?
It may result in higher prices and inefficiency.
When does monopsony exist?
When there is one buyer of a good, it allows the monopsonist to influence prices paid.
What to produce?
Each country must choose what gets to produce with its resources.
How to produce?
Figure out steps to decide how best to produce
Who benefits?
This question is sometimes stated “for whom “the income tolls.
Or Who gets it?
England is mostly
Capitalism, but it has a large government and does some things because of traditions.
What are the two primary economic framework at work in the modern world?
Capitalism and socialism
When we say our economy is a mixed capitalism what does it mean?
Having elements of both capitalism and socialism plus pieces that are technically neither.
Capitalism in an economic system is characterized by
Private ownership of capital
Market Allocation
Self interest motivations
Capital
Capital is human made goods that are used to make other goods such as factories machinery trucks and airplanes
In a capitalist system who is allowed to own the capital and keep the money that it earns?
Private citizens
The owners of capital in capitalism
Are going to be high income folks
Market
If Market is a place where buyers and sellers come together to negotiate exchanges of Goods.
In capitalism, who decides what is made, how it is made and who gets the income?
The markets
Markets to not require
One on one negotiations
In markets there is a negotiation,
But it is a group negotiation that shows itself in where consumers shop and how much they buy
What is another name for capitalism
The price system
Who creates prices?
Markets create prices, and those prices give us the information we use to make our choices
There are markets for
More than consumer goods
In a capitalist system, people and businesses
Are supposed to do what they think is best for themselves, to be motivated by their own interest. This does not mean that capitalism ignores the social good, rather it means just the opposite.
The great British economists Adam Smith
Established the theoretical foundation of capitalism. In his theory, people who pursue their own interest will be led to do what’s best for society.
Capitalism provides an incentive for
People to work hard, to try their best, because they stand to be rewarded for doing so.
Socialism is an economic system characterized by
Government ownership of capital
Planned allocation
Social interest motivations
In a socialist system
The government owns the capital and in theory uses it for the benefit of all .
The answers to the basic economic questions in socialism comes from
The use of planning
Planned systems are sometimes called
Command economies, because economic activity is at the command of the government.
Socialism demands that
People do what is best for the society, not what is best for themselves as individuals.
Karl Marx wrote that
The system required each person to give according to his or her ability, but to be rewarded according to his or her needs.
So you do the right thing such as working hard without regard to what’s in it for you.
No country in the world is gone by one of the economic systems.
True
The United States is
Mostly a capitalist country, the government still limits or prohibits the production and sale of goods.
The United States is an example of
Mixed capitalism.
Mixed capitalism
Most economic activity is market-based capitalism, but there is direct government production of goods and services, and government regulation of the private sector production.
What are markets about
Markets are about buyers and sellers, and their negotiations
In a competitive market
No buyer is forced to buy, no seller is forced to sell.
Markets make both
The buyers and sellers better off, because exchanges are voluntary. Buyers part with the money only when they value what they get more than their money, and seller sell only when the money they receive is worth more to them than the goods they have.
we believe that a number of mistakes made in a capitalist system
is smaller than the number of mistakes made in other systems and that the consequences of those mistakes are smaller as well
The power of markets is enhanced by the fact that
Markets have built-in incentives for the buyers and sellers
What incentives to consumers have in a market?
They are determined to maximize their utility, so they have an incentive to shop around -a good consumer will know what products are available and what the prices are before they make a choice.
The buyers behavior of shopping for the best deal creates a
Positive incentive to the seller to provide a better deal than the competitor.
In a competitive market
No seller is assured of having their goods purchased
Innovation
Innovation is the creation or invention of newgoods and services or new ways of operating a business
In a market driven economic system
Innovation occurs automatically as a consequence of the normal incentives of markets.
The maximum output of society is always
Limited
Why are Market based economies naturally strong?
Because each business has an incentive to use the minimum amount of resources required to produce its products, leaving the maximum amount of resources available for other businessesl to use in production.
A market-based economic should naturally be efficient in its use of
Resources – land labor and capital
Markets and workers efficiency
If wages are determined in the marketplace, the most valuable worker will receive the highest pay
What to market say to workers?
To be efficient, work hard, and you will be rewarded.
Markets are
Decentralized
Decentralized
Means there is no single person or institution that makes decision for everyone.
Why do markets work so well?
Because there are so many of them
When one person makes a mistake
It’s effects on minimized because the span of the decision is small and competitors are waiting and willing to take advantage.
Capitalism is a system based on
The power of markets
Advantages of capitalism and markets
Incentives for efficient production by each firm.
Decentralization of decision-making
Incentives for innovation
Individual behaviors that work towards maximizing the output and efficiency of the entire nation.
Planning
Planning in a national sense, means that someone or some group of people in the government determine the answers to some or all of the basic economic questions what to produce, how to produce and who benefits.
In a market system the answers to the three basic questions are made
On a decentralized basis by millions of people
How does the planned economy work?
Typically, a central planning agency that is part of the national government creates a plan for the economy.
The centralized nature of decision-making creates
A complex and fragile system with many single points of failure.
In a planned economy, the firm
Is told what to do.it’s incentive is meeting the goals set for it in terms of producing a certain amount of output.
In a planned system,workers are
Typically paid a fixed wage, regardless of their work effort.
In a planned economy what things will a consumer know?
Quailty is likely to be poor and lines are likely to be long.
The planned economy
Because it lacks incentives, and its decision making is centralized, the planned economy is going to be inefficient compared to the market based economy.
A planned economy is unlikely to be innovative or in any meaningful way responsive to its consumers.
Why do some people still favor the planned economy?
- there are times when markets don’t work well and some form of planning is required.
- There are people who dislike market-based outcomes because they are uneven in the rewards they create.
- A planned economy might provide more equal distribution of income across the population.
- The idea of people placing the greater good of the society above their own interest is also compelling to some people.
Do United States and all of the countries are mixed economies
With elements of Market and elements of planning interwoven
Just as in a planned economy, the mixed economy also requires that
Your success is based on your ability to meet your quota of production and your success outside is based on your ability to understand and manipulate the system
What are the four causes of market failure?
Public goods
Externalities
asymmetric information
monopoly power
Market failure can sometimes be overcome by
Planning
However one of the more interesting topics of modern economics is
finding Market solutions to the problems of market failure
Public goods
A public good is both non-rivalrous and nonexclusive.
Example National defense, the army, the Navy, Air Force
A good is considered to be exclusive when
You pay to get them
A good is considered to be rivalous
When once consumed by me, it cannot be consumed by others.
Why are public goods considered an example of market failure?
Because public goods always create free riders
Free riders
People who want a good to be produced, but expect to benefit by consuming it without having to pay.
The only way Economists know to produce enough of a public good is
For it to be produced by the government, which can make each person pay their share.
Forced riders
Someone who shares a pay of the cost of a public good but does not share the benefits.
Common property resource
Is something that is jointly owned by all .
For example the fish in the ocean, the trees ,the rivers, Buffalo etc
In what way can we protect the common property resource
Through group action, either the government or people working together to protect the resource
Externalities
And externality occurs when a choice by one party creates cost or benefits for another party who is not part of the decision that resulted in the choice.
Types of externalities
Negative externality example lack of hygiene
Positive externality example city builds a park next to your house which will increase the value of your house.
When a person makes a choice
There are cost and benefits to them, which we call the private cost and benefits.
Social cost and benefits
The total of all cost and benefits to everyone are called the social costs and benefits.
Market works correctly when
The private cost and benefits are equal to the social cost and benefits
The market fails when
There is a difference between the private and social cost of benefits
When a negative externalities exist from a good
More of it will be produced than is socially optimal because the buyers of the good pay less than the true social cost of the good. So the market has failed.
When positive externalities exist
Goods are under produced
Example of positive externalities
education
How are externalities resolved
Externalities are often resolved by government intervention example environmental laws or lawsuits decided in court to make the private person pay the social cost, which is called internalizing the externality.
In a competitive market
Buyers and sellers get together and negotiate an exchange for a price
When does asymmetric information occur?
When either the buyer or seller has more information about the transaction than the other
What are the problems caused by asymmetric information
Adverse selection
Moral hazard
Adverse selection
Is the idea that some goods may not get to the market at all because the seller assumes that they cannot get a fair selling price for them.
When does moral hazard occur
When the seller is ignorant of the true intentions or nature of the buyer.
How can asymmetric information problems be solved?
Through signaling
Signaling
It occurs when the buyer or seller sends additional information or provides some form of assurance that the good being bought or sold is as advertised.
Example provide a warranty to the buyer
Unless the buyers and sellers can get the information they need, either directly or by special signaling that takes place,
The market will not work correctly and Either the transaction will not take place or goods will be under valued
Not all markets are
Competitive.
Monopoly power
When the seller has a degree of power over the market
A monopoly exist when
There is only one seller of a good
Where competition is strong, no seller can demand exorbitant prices
Because consumers will switch to another seller
Monopoly power can create market failure
Because it destroys the incentives we associate with markets
True monopoly lacks any incentive for efficiency or quality
Because consumers have no alternatives
Where monopoly power exists
We expect higher prices, lower quality and less efficiency
For those few forms that have strong monopoly power, the government usually solves the problem
But either regulating the firm or taking legal action against it
The flipside of monopoly power is
Monopsony
When does Monopsony occur
When there is only one buyer of a good
Where Monopsony occurs , the most common response is
For the workers to join a union, which then becomes a monopoly selling labor to the firm.
