02 The Market System and the Circular Flow

02 The Market System and the Circular Flow Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Market System • Known as capitalism • Characteristics of market systems: Private property Freedom of enterprise and choice Self-Interest Competition Markets and prices • Australia, Switzerland, and the U. K. LO 1 2 -2

Global Perspective Index of Economic Freedom, Selected Nations LO 2 2 -3

Technology and Capital Goods • Advanced technology and capital • LO 2 goods are encouraged Specialization • ___________ • Geographic ______ 2 -4

Active, but Limited Government • Government may be needed to • LO 2 ___________ market failures Government can increase ___________ of a market system 2 -5

The Five Fundamental Questions • What goods and services will be • • LO 3 produced? How will the goods and services be produced? Who will get the goods and services? How will the system accommodate change? How will the system promote progress? 2 -6

What Will Be Produced? • Goods and services that create a • LO 3 __________ “Dollar Votes” (Below) “Voting with your Dollars” • Method for consumers to __________ which goods will be produced • Determines which products and industries survive or fail 2 -7

How Will the Goods Be Produced? • ________ the cost per unit by using the most efficient techniques • Technology • Prices of the necessary resources LO 3 2 -8

Who Will Get the Output? • Consumers with the • LO 3 _________ and willingness to pay will get the product Ability to __________ depends on income 2 -9

How Will the System Change? • Changes in consumer ______ • Changes in _______ • Changes in resource ___________ LO 4 2 -10

How Will the System Promote Progress? • Technological advance • Creative _______(Joseph Schumpeter) • ________ accumulationmost technological advances require additional capital goods. (Page 37) LO 4 2 -11

The “Invisible Hand” • 1776 ________ by Adam • LO 4 Smith • Unity of private and social interestenhanced products increases society’s ______ Virtues of the market system (P 38) • Efficiency • Incentives • Freedom 2 -12

Demise of Command Systems • Soviet Union, Eastern Europe, and • • • LO 4 China System was a _________ The coordination problem(Pg 38) • Set _____ targets for all goods The incentive problem (Pg 38) • No _______ for surplus or shortage 2 -13

The Circular Flow System RESOURCE MARKET • Households sell • Businesses buy BUSINESSES • buy resources • sell products HOUSEHOLDS • sell resources • buy products PRODUCT MARKET • Businesses sell • Households buy LO 5 2 -14

Businesses • Three main categories of businesses • Sole proprietorship • Partnership • Corporation LO 5 2 -15