The Economizing Problem part 2 Please listen to the audio as you work through the slides.

Market: An institution or mechanism that brings together buyers and sellers of particular goods, services, or resources.

Economic Systems Every society has one Set of institutional arrangements that support the exchange of goods and services – An economic system has to determine What goods are produced, How they are produced, Who gets them, How to accommodate change Coordinating mechanisms Differ based on: – Who owns the factors of production – What method directs economic activity

Economic Systems - Extreme Types The market system – Capitalism – Private sector capitalism – Government sector capitalism – Private ownership of resources – Markets – coordinating mechanism The command system – Government ownership of resources – Central planning board – coordinating mechanism

Market System (Capitalism) Characteristics An Economic system that relies upon markets to allocate resources and determine prices – Examples? Private property (ownership of capital and other resources) Negotiate legal contracts – `Assumes a legal structure

Market System (Capitalism) Characteristics Freedom of enterprise and choice – Businesses, workers, consumers Self-interest – individuals, firms, governments Competition among economic units – Diffuses power Markets and prices (the coordinators)

Market System (Capitalism) Characteristics Technology and capital goods Specialization – Division of labor – Geographic specialization Use of money Active, limited government (pure capitalism) Instability!!!! – Inflation, Unemployment, Growing inequality

Just so you know! Markets do not respect the sustainable yield thresholds of natural systems! Prices do not reflect the total costs of production and therefore send false signals. Market System (Capitalism) Characteristics

Command Systems Examples Soviet Union, old Cuba, old China, North Korea System was a failure – The coordination problem Set output targets for all goods without input from demand side. Input / output synchronization problem. – The incentive problem No adjustments for shortage or surplus No incentive to produce more, or less.

Circular Flow Model Assumptions Closed model – – No Government – No International Trade 2 Sectors – Household sector – Business sector 2 Markets – Resource market (factor market) – Product market (market for goods and services)

Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS PRODUCT MARKET Circular Flow Model

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES GOODS & SERVICES SERVICES PRODUCT MARKET Circular Flow Model

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES Circular Flow Model

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE Circular Flow Model

BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE

Please thoroughly explain the Circular Flow Model. Step 1 – construct an outline Step 2 – construct your response based on the outline

economizing problem economic resources land capital investment labor entrepreneurial ability factors of production full employment full production productive efficiency allocative efficiency consumer goods capital goods production possibilities table production possibilities curve opportunity cost law of increasing opportunity costs economic growth economic system market system capitalism command system resource market product market Circular Flow Model