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
Division of labor
Geographic specialization
LO2
2-4

5. Active, but Limited Government
Government may be needed to alleviate market failures
Government can increase effectiveness 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 profit “Dollar Votes”
What Will Be Produced?
Goods and services that create a profit
“Dollar Votes”
Method for consumers to determine which goods will be produced
Determines which products and industries survive or fail
LO3
2-7

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

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

10. How Will the System Change?
Changes in consumer tastes
Changes in technology
Changes in resource prices
LO4
2-10

11. How Will the System Promote Progress?
Technological advance
Creative destruction
Capital accumulation
LO4
2-11

12. 1776 Wealth of Nations by Adam Smith
The “Invisible Hand”
1776 Wealth of Nations by Adam Smith
Unity of private and social interest
Virtues of the market system
Efficiency
Incentives
Freedom
LO4
2-12

13. Demise of Command Systems
Soviet Union, Eastern Europe, and China
System was a failure
The coordination problem
Set output targets for all goods
The incentive problem
No adjustments 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