Chapter 2 the market system and the circular flow Chapter objectives Economic systems Market systems characteristics Market system questions What, how, who Change and progress in the market system The circular flow model Economic systems Set of institutional arrangements Coordinating mechanism Differ based on: Who owns the factors of production What method directs economic activity The market system Private ownership Markets The command system Government ownership Central planning board Index of economic freedom Ranking of 157 countries for 2008 Market system characteristics Private property Freedom of enterprise and choice Self-interest Competition Markets and princes Technology and capital goods Specialization Division of labor Geographic specialization Use of money Active, limited government Market system questions What will be produced? Consumer sovereignty Dollar votes How will goods be produced? Technology Resource cost Who get the output? Willingness to pay How is change accommodated? Self-interest How id progress promoted? Technological advance Capital accumulation The invisible hand 1776 Wealth of Nations by Adam Smith Unity of private and social interest Virtues of the market system Efficiency Incentives Freedom The 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 surplus. Key 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
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