ECONOMIC SYSTEMS Each economic system differ in who owns factors of production methods used to motivate coordinate and direct economic activity command system socialism communism government owns most property resources economic decision making occurs through central economic plan central planning board appointed by government makes nearly all major decisions concerning use of resources composition and distribution of output organization of production gov owns most of business firms produce according to government directives central planning board determines production goals for each enterprise and specifies amount of resources to be allocated to each enterpreise to it can reach production goals output between capital and consumer goods is centrally decided capital goods are allocated among industries on basis of central planning board s long term priorities market system capitalism private ownership of resources and use of markets and prices to coordinate and direct economic activity participants act in own self interest and make own decisions allows for private ownership of capital communicates through prices coordinates economic activity through markets competition among independently acting buyers and sellers economic decision making is widely dispersed high potential for monetary rewards created powerful incentives for existing firms to innovate and create new products laissez faire pure capitalism gov role is limited to protecting private property and establishing environment appropriate to operation of market sys CHARACTERISTICS OF MARKET SYSTEM private property private individual and firms own property resources land and capital right of private property coupled with freedom to negotiate binding legal contracts enable individuals and businesses to obtain use and dispose property recourses as they see fit also extend to intellectual property patents copyrights trademarks encourages people to produce to invent new products and production processes without fear that others will steal them and reward they may bring property rights facilitate exchange encourage owners to maintain improve property to preserve increase value rather than using them to protect and retain property they ve already acquired freedom of enterprise and choice freedom of enterprise ensures entrepreneurs and private businesses are free to obtain and use economic resources to produce choice of goods and services and to sell them in chosen markets freedom of choice enables owners to employ dispose property and money as they see fit allow workers to enter line of work for which they re qualified ensures consumers are free to buy G S that best satisfy wants chocies are free only within broad legal limitations eg Can t sell buy human organs drugs self interest motivating force of various economic units as they express free choices each economic unit tries to achieve its own particular goal requires delivering something of value to others what each firm property owner worker and consumer believes is best for oneself give direction and consistency to what might otherwise be a chaotic economy competition basis of competition is freedom of choice exercised in pursuit of monetary return requires independently acting sellers and buyers operating in particular product factor market freedom of sellers and buyers to enter leave markets on basis of economic self interest diffuses economic power within businesses and households that make up the economy can t independently dictate price because others can undercut it implies producers can enter leave industry no barriers to an industry s expanding or contracting providing flexibility eneded to remain efficient voer time freedom of entry and exit enables economy to adjust to changes in consumer tastes tech factor availability diffusion of economic power inherent in competition limits potential abuse of that power producer that change more than market competitive price will lose sales employer with low wages will lose workers firm that fails to exploit new tech will lose profit therefore competition is basic regulatory force in market system markets and prices market any institution mechanism that bring together buyers ans sellers of particular goods services or resources for purpose of exchange acts as elaborate communication network technology and capital goods most direct methods of production are often least efficient only way to avoid inefficiency is to rely on capital goods more efficient production means more abundant output specialization use of resources of an individual regional or nation to produce one more G S rather than entire range of G S which are then exchanged for a full range of desired products majority of consumers produce virtually none of G S they consume consume little none of items they produce eg ppl producing aircrafts may not fly planes human specialization division of labour increases total output society derives from limited resources contributes to society s output in numerous ways 1 specialization makes use of differences in ability enables individ To take advantage of existing differences in abilities and skills 2 specialization fosters learning by doing 3 specialization saves time avoid loss of time incurred in shifting from 1 job to another geographic specialization works on a regional and international basis Canada focuses on specific fields and trades for other countries specialties use of money money acts as medium of exchange items sellers generally accept and buyers generally use to pay for G S to make trade easier specialization requires exchange and can sometimes occur through barter swapping one G S for another but only occurs in there s a coincidence of wants active but limited government last characteristic of market systems promotes high degree of efficiency in resource use can have shortcomings FIVE FUNDAMENTAL QUESTIONS to market systems WHAT WILL BE PRODUCED consumers are sovereign in command consumer sovereignty determines types and quantities of G S produced dollar votes register wnts of consumers in the market if dollar votes for certain product is large enough to create profit businesses will produce it HOW WILL G S BE PRODUCED in combinations and ways that minimize cost per unit of output most efficient production techniques depend on available technology various combo of resources to produce most output price of needed resources WHO WILL GET THE G S ability to buy G S depends on income preferences and prices amount of