Slide 1Chapter ObjectivesEconomic SystemsSlide 4Index of Economic FreedomMarket System CharacteristicsSlide 7Market System QuestionsSlide 9The Invisible HandThe Command SystemCircular FlowSlide 13Slide 14Key TermsNext Chapter Preview…The Market System and the Circular FlowChapter 2McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter Objectives•Economic systems•Market system characteristics•Market system questions–what, how, and who•Change and progress in the market system •The circular flow model2-2Economic Systems•Set of institutional arrangements•Coordinating mechanism•Differ based on:–Who owns the factors of production–What method directs economic activity2-3Economic Systems•The market system–Private ownership–Markets•The command system–Government ownership–Central planning board2-4Index of Economic FreedomFree MostlyFreeMostlyUnfreeRepressed1- Hong Kong3- Ireland5- United States20- Belgium31- Spain48- France101- Brazil126- China134- Russia148- Venezuela156- Cuba157- North KoreaRanking of 157 countries for 20082-5Market System Characteristics•Private property•Freedom of enterprise and choice•Self-interest•Competition•Markets and prices2-6Market System Characteristics•Technology and capital goods•Specialization–Division of labor–Geographic specialization•Use of money•Active, limited government2-7Market System Questions•What will be produced?–consumer sovereignty–dollar votes•How will goods be produced?–technology–resource cost2-8Market System Questions•Who gets the output?–willingness to pay•How is change accommodated?–self-interest•How is progress promoted?–technological advance–capital accumulation2-9The Invisible Hand•1776 Wealth of Nations by Adam Smith–Unity of private and social interest•Virtues of the market system–Efficiency–Incentives–Freedom2-10The Command System•Soviet Union, Eastern Europe, China•System was a failure•The coordination problem–Set output targets for all goods•The incentive problem–No adjustments for shortage or surplus2-11Circular FlowResourceMarketProductMarketBusinesses Households2-12Circular FlowResourceMarketProductMarketBusinesses Households2-13Circular FlowResourceMarketProductMarketBusinesses HouseholdsFigure 2.2; page 402-14Key Terms •economic system•command system•market system•private property•freedom of enterprise•freedom of choice•self-interest•competition•market•specialization•division of labor•medium of exchange•barter•money•consumer sovereignty•dollar votes•creative destruction•“invisible hand”•circular flow diagram•resource market•product market2-15Next Chapter Preview…Demand, Supply, and the Market
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