Market System Characteristics Private property Freedom of choice
- Slides: 12
Market System Characteristics • • • Private property Freedom of choice Self-interest Competition Markets and prices
Market System Questions • What will be produced? – dollar votes • How will goods be produced? • Who gets the output?
Market System Characteristics • Technology and capital goods • Specialization – Division of labor – Geographic specialization • Use of money • Active, limited government
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 • The coordination problem – Set output targets for all goods • The incentive problem – No adjustments for shortage or surplus
The Simple Circular Flow
The Simple Circular Flow
The Simple Circular Flow
The Simple Circular Flow
The Simple Circular Flow Businesses Households
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.
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