1. The Market System and the Circular Flow02
The Market System and the Circular Flow
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Characteristics of market systems:
The Market System
Known as capitalism
Characteristics of market systems:
Private property
Freedom of enterprise and choice
Self-Interest
Competition
Markets and prices
Australia, Switzerland, and the U.K.
LO1
2-2

3. Index of Economic Freedom, Selected Nations
Global Perspective
Index of Economic Freedom,
Selected Nations
LO2
2-3

4. Technology and Capital Goods
Advanced technology and capital goods are encouraged
Specialization
_____________________
Geographic ___________
LO2
2-4

5. Active, but Limited Government
Government may be needed to ______________________ market failures
Government can increase ______________________ of a market system
LO2
2-5

6. The Five Fundamental Questions
What goods and services will be produced?
How will the goods and services be produced?
Who will get the goods and services?
How will the system accommodate change?
How will the system promote progress?
LO3
2-6

7. Goods and services that create a ___________________
What Will Be Produced?
Goods and services that create a ___________________
“Dollar Votes” (Below) “Voting with your Dollars”
Method for consumers to ___________________ which goods will be produced
Determines which products and industries survive or fail
LO3
2-7

8. How Will the Goods Be Produced?
_______________ the cost per unit by using the most efficient techniques
Technology
Prices of the necessary resources
LO3
2-8

9. Ability to ___________________ depends on income
Who Will Get the Output?
Consumers with the __________________ and willingness to pay will get the product
Ability to ___________________ depends on income
LO3
2-9

10. How Will the System Change?
Changes in consumer ____________
Changes in ______________
Changes in resource ______________________
LO4
2-10

11. How Will the System Promote Progress?
Technological advance
Creative ______________(Joseph Schumpeter)
________________ accumulation-most technological advances require additional capital goods. (Page 37)
LO4
2-11

12. 1776 ________________ by Adam Smith
The “Invisible Hand”
1776 ________________ by Adam Smith
Unity of private and social interest-enhanced products increases society’s ____________
Virtues of the market system (P 38)
Efficiency
Incentives
Freedom
LO4
2-12

13. Demise of Command Systems
Soviet Union, Eastern Europe, and China
System was a _________________
The coordination problem(Pg 38)
Set _________ targets for all goods
The incentive problem (Pg 38)
No ______________ for surplus or shortage
LO4
2-13

14. The Circular Flow System
RESOURCE
MARKET
Households sell
Businesses buy
Costs
Rent, Wages, Interest,
Profits
Land, Labor, Capital,
Entrepreneur
Land, Labor, Capital,
Entrepreneur
BUSINESSES
buy resources
sell products
HOUSEHOLDS
sell resources
buy products
Goods and Services
Goods and Services
PRODUCT
MARKET
Businesses sell
Households buy
Expenditures
Consumption
Revenues
LO5
2-14

15. Three main categories of businesses Sole proprietorship Partnership
Corporation
LO5
2-15