Market System

Question 1

What are the characteristics?

Remember: Special PMS frees activity on competitive tech and money

Answer 1

A.) Private individuals and firms own most of the private property (land and capital).

B.) Freedom of enterprise and choice exist.

C.) Self Interest

D.) Competition among buyers and sellers is the controlling mechanism.

E.) Markets and Prices

F.) Reliance on technology and capital goods

G.) Specialization

H.) Use of money as median of exchange

I.) Active but limited government

Question 2

Private Individuals and firms own most of the private property (land and capital).

Answer 2

1. ) Couple w/ freedom to negotiate binding legal contracts, enables individuals to obtain, control, use, and dispose of this property
2. ) spur mutually agreeable transactions
3. ) encourage investment, innovation, exchange of assets, maintenance of property, and economic growth
4. ) property rights extend to intellectual property through patents, copyrights, and trademarks

Question 3

Freedom of enterprise and choice exist

Answer 3

1.) Entrepreneurs and businesses have the freedom to (a) obtain and use resources, (b) to produce products of their choice, and (c) to sell these products in the market of their choice.

2. ) COWs:
   - Consumers are free to spend their income in such a way as to best satisfy their wants
   - Owners of property and money resources can use resources as they choose
   - Workers can choose the training, occupations, and jobs of their choice

Question 4

Self-Interest

Answer 4

1. ) The driving forces in a market system
   - Entrepreneurs try to maximize profits and minimize losses
   - Resource suppliers try to maximize income
   - Consumers maximize satisfaction

2.) As each tries to maximize profits, income, and satisfaction, the economy will benefit if COMPETITION is present

Question 5

Competition among buyers and sellers is a controlling mechanism

Answer 5

1. ) Large number of SELLERS = no single PRODUCER or SELLER can control the price or market SUPPLY
2. ) Large number of BUYERS = no single CONSUMER or EMPLOYER can control the price or market DEMAND
3. ) Depending upon market conditions, producers can ENTER or LEAVE industry easily

Question 6

Markets and Prices

Answer 6

1. ) A market system conveys the decisions of the many buyers of the product and resource markets
2. ) A market = an institution or mechanism that brings buyers and sellers into contact
3. ) Individual decisions by buyers and sellers in the market determine the product and resource prices that, in turn, guide further decisions by resource owners, producers, and consumers
4. ) Those who respond to the market signals will be rewarded with profits and income

Question 7

Reliance on technology and capital goods

Answer 7

1. ) Competition, freedom of choice, self-interest, and the potential of profits provide the incentive for capital accumulation (investment).
2. ) Advanced technology and capital goods promote efficiency and greater output.

Question 8

Specialization

Answer 8

1. ) Division of labor allows workers to specialize.
   a. ) people can take advantage of differences in abilities and skills
   b. ) people w/ identical skills may still benefit from specializing and improving certain skills (learning by doing)
   c. ) saves time involved in shifting from one task to another

2.) Geographical specialization: Regional and international specialization take advantage of localized resources

Question 9

Use of money as a medium of exchange

Answer 9

1. ) Money substitutes for barter, which requires a coincidence of wants
2. ) Willingness to accept money in place of goods permits 3-way trades (multilateral trades)

Question 10

Active, but limited government

Answer 10

1. ) Although market system promotes efficiency, it has shortcomings
   - production of goods and social costs
   - production of goods with social benefits
   - tendency for businesses to increase monopoly power
   - macro instability