Copyright 2011 The McGraw-Hill Companies 2-1 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show 2 The Market System and the Circular Flow

Copyright 2011 The McGraw-Hill Companies 2-2 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Chapter Objectives Role players in the economy The Mechanics of the Circular Flow Command Systems vs. Market Systems Characteristics of a Market System How Markets Determine What to Produce, How to Produce, and Who Receives the Output How Market System Adjusts to Change and Promotes Progress

Copyright 2011 The McGraw-Hill Companies 2-3 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Role Players in the economy Households Business Enterprise The Government Foreign Sector

Copyright 2011 The McGraw-Hill Companies 2-4 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Circular Flow Resource Market Product Market BusinessesHouseholds

Copyright 2011 The McGraw-Hill Companies 2-5 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Circular Flow Resource Market Product Market BusinessesHouseholds

Copyright 2011 The McGraw-Hill Companies 2-6 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Circular Flow Resource Market Product Market BusinessesHouseholds Both Flows Are Equal

Copyright 2011 The McGraw-Hill Companies 2-7 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Circular Flow Resource Market Product Market BusinessesHouseholdsGovernment Goods & Services Goods & Services Net Taxes Expenditures Goods & Services Resources

Copyright 2011 The McGraw-Hill Companies 2-8 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Circular Flow further expanded Resource Market Product Market Businesses Households Government Foreign Exchange Market Capital and Labour income Controlled Capital And Labour flows

Copyright 2011 The McGraw-Hill Companies 2-9 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Resource Market Product Market Businesses Households Government Foreign Exchange Market Foreign Sector Capital and Labour income Controlled Capital And Labour flows Export, Import payments Export and Import of Goods and Services

Copyright 2011 The McGraw-Hill Companies 2-10 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Economic Systems Economic System Defined –Ownership of Factors of Production –Method Used to Motivate, Coordinate, and Direct Economic Activity Command System –Socialism or Communism Market System –Capitalism –Pure Capitalism – Laissez-Faire 2.1

Copyright 2011 The McGraw-Hill Companies 2-11 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System Private Property Freedom of Enterprise Freedom of Choice Characteristics FreeMostly Free Moderately Free Repressed 1- Hong Kong 3- Australia 6- United States 19- Japan 20 – Belgium 29 - Spain 34-Botswana 61- SA 63- Uganda 160- Bangladesh 173-DRC 178-Zimbabwe Source: Heritage Foundation ( and The Wall Street Journal

Copyright 2011 The McGraw-Hill Companies 2-12 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System Self-Interest Competition Markets and Prices Technology and Capital Goods Specialization Division of Labor Characteristics

Copyright 2011 The McGraw-Hill Companies 2-13 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System Geographic Specialization Use of Money –Medium of Exchange –Barter Active but Limited Government Characteristics

Copyright 2011 The McGraw-Hill Companies 2-14 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show LIMPOPO Excess: Oranges Want: Maize Money Facilitates Trade FREE STATE Excess: Maize Wants: Oranges MPUMALANGA Excess: Potatoes Wants: Oranges

Copyright 2011 The McGraw-Hill Companies 2-15 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System What Goods Will Be Produced? –Consumer Sovereignty –Dollar Votes How Will the Goods Be Produced? –Available Technology –Prices of Needed Resources Five Fundamental Questions

Copyright 2011 The McGraw-Hill Companies 2-16 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System Who Will Get the Output? How Will the System Accommodate Change? How Will the System Promote Progress? –Technological Advance –Creative Destruction –Capital Accumulation Five Fundamental Questions

Copyright 2011 The McGraw-Hill Companies 2-17 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System 1776 Wealth of Nations by Adam Smith –Efficiency –Incentives –Freedom The “Invisible Hand”

Copyright 2011 The McGraw-Hill Companies 2-18 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show The Market System Two Insurmountable Problems –The Coordination Problem –The Incentive Problem Demise of Command Systems USSR Yugoslavia East Germany

Copyright 2011 The McGraw-Hill Companies 2-19 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Shuffling the Deck Extreme Number of Playing Card Combinations Tens of Billions of Worldwide Resources Many Combinations Useless Private Property Facilitates Best Choice Selections – Mutual Accommodations Result is a Complex and Productive Arrangement of Resources Many Small Decisions that Others Find Helpful Last Word Markets Systematically and Purposefully Rearrange the World’s Resources

Copyright 2011 The McGraw-Hill Companies 2-20 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Key Terms Page economic system command system market system private property freedom of enterprisefreedom of enterprise freedom of choice self-interest competition market specialization division of labor medium of exchangemedium of exchange barter money consumer sovereigntyconsumer sovereignty dollar votes creative destruction “invisible hand” circular flow diagramcircular flow diagram resource market product market

Copyright 2011 The McGraw-Hill Companies 2-21 Role Players The Circular Flow Economic Systems The Market System The Five Fundamental Questions The Invisible Hand Demise of Command Systems Last Word Key Terms End Show Next Chapter Preview… Demand, Supply, and the Market Equilibrium