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

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

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

4. 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

5. 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

6. The Simple Circular Flow

7. The Simple Circular Flow

8. The Simple Circular Flow

9. The Simple Circular Flow

10. The Simple Circular Flow
Businesses
Households

11. 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.

12. 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