Market System Characteristics

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Presentation transcript:

Market System Characteristics Private property Freedom of choice Self-interest Competition Markets and prices

Market System Questions What will be produced? dollar votes How will goods be produced? Who gets the output?

Market System Characteristics Technology and capital goods Specialization Division of labor Geographic specialization Use of money Active, limited government

The Invisible Hand Virtues of the market system Efficiency Incentives 1776 Wealth of Nations by Adam Smith Unity of private and social interest Virtues of the market system Efficiency Incentives Freedom

The Command System Soviet Union, Eastern Europe The coordination problem Set output targets for all goods The incentive problem No adjustments for shortage or surplus

The Simple Circular Flow

The Simple Circular Flow

The Simple Circular Flow

The Simple Circular Flow

The Simple Circular Flow Businesses Households

The Simple Circular Flow Two observations In every economic exchange, the seller receives exactly the same amount that the buyer spends. Goods and services flow in one direction and money payments flow in the other.

The Simple Circular Flow Profits explained Question Why is profit a cost of production? Answer Profits are the return entrepreneurs receive for the risk they incur when organizing productive activities

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