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ECN 104 The Market System and the Circular Flow

ECN 104

The Market System and the Circular Flow

(CHAP2)

Laissez-Faire Capitalism

  • K.A pure capitalism
  • The government’s role I limited to protecting private property, and establishing a legal environment.

The Command System

  • Most property resources are owned by the government.
  • Economic decisions are made by a central government body

The Market System

  • Property resources are privately owned
  • Markets and prices are used to direct and coordinate economic activities.

Private property

  • The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
  • Property rights encourage people to cooperate by

Characteristics of the Market System

Freedom of enterprise and choice

  • Freedom of enterprise

Businesses can buy and sell as they choose

Freedom of choice

  • Owner can use as sell property as they choose
  • Workers can work where they like
  • Consumers can buy what they want

Self-interest is the motivating force of economic units

  • Entrepreneurs try to maximize profit or minimize loss
  • Property owners try to get the highest price for the sale or rent of their resources
  • Workers try to maximize their utility (satisfaction) by finding jobs that offer the best combination of wages, hours, fringe benefits, and working conditions
  • Consumers try to obtain the products they want at the lowest possible price and apportion their expenditures to maximize their utility

 Competition

  • Independently acting sellers and buyers operation in a particular product or factor market

No single buyer or seller is able to dictate the price of the product or factor.

  • Freedom of sellers and buyers to enter or leave markets, on the basis of their economic self-interest.

Helps the economy to remain efficient over time

Enables the economy to adjust to changes in consumer tastes, technology, and factor availability.

2.1 Global Perspective

   Index of economic freedom, selected nations

  • The index of economic freedom measures economic freedom using ten broad

Markets and Price

  • A market is an institution or mechanism that brings buyers(demanders) and sellers (supliers) onto contact.
  • The coordinating mechanism of capitalism is a system of markets and prices
  •  Through this mechanism society decides what the economy should pro

Technology and Capital Goods

  • In the market system, competition, freedom of hice, self- interest, and personal reward provide the opportunity and motivation for technological advance
  • Ectersive use of technologically advanced capital goods helps markets economies achieve greater efficiency in production

Specialization

  • Use of economic resources to produce a few goods and services instead of many , to achieve higher feeiciency

Division of labour

  • Ability differences
  • Learning by

One use of money is that is acts as medium of exchange.

Barter requires coincidence of wants

Figure 2-1 money facilitates trade when wants do not coincide

Active but limited government

  • Market failures

Government can increase the overall efficiency of the economic system it the markest system fails(pollution)

The contract government, alone with the central bank, need to take action of a market economy is experiencing recession or inflation

Jacob clifford’s econmovies

Capitalism, specialization and comparative advantage

The hunger games

Five fundamental questions

  • What will be produced?
  • How will the goods and services be produced?
  • Who will get the output?
  • How will the system accommodate change?
  • How will the system promote progress?
  1. What will be produced?
  • The goods and services that can be produced at a continuing profit (TP>TC). See chapter8.
  • Consumers determine the types and quantities. See chapter 7
  • Dollar votes reflect wants.
  • The employment of resources derives from the sale of the goods and services they help produce
  1. How will the goods and services be produced?
  • Minimize the cost per unit by using the most efficient techniques see chap8,16
  •  The right mix factors of production
  1. Who will get the output?
  • Consumers with the ability and willingness to pay will get the product. See vhap3,7
  • - ability to pay depends on income.
  • - - income depends on (a) property and human resources and (b) resoures prices in the markets for factors of production, see chap 8,16
  • - willingness dependents on tastes/preferences, see chap7
  1. How will the system accommodate change?
  • Changes in consumers tastes
  • Changes in technology
  • Changes in resource prices

The directing or guiding function of prices and profits is a core element of the market system. See chap 9 to 13

  1. How will the system promote progress?
  • Technological advance
  • Innovation in product( income increasing)
  • Innovation in process( cost reducing)

       Creative destruction

  • Capital accumulation
  •  Entrepreneurs and business owner

The Invisible Hand

  • Under a highly competitive markest system, private interest and social interst coincide.
  • Prices communicate info about scarcity and value.
  • Competition forces produces and resource suppliers to respond.
  •  Firms, acting in their own best interest, also promote society’s

Three special merits of the market system;

  • Efficiency
  •  In use of resource
  •  In use of techniques of production
  •  In development of new and more efficient techniques
  1. The circular flow model

 Households

  • One or more persons occupying a housing unit.
  • Buy the goods and services provided by businesses in the product market
  • Obtain the income needed to bu

Businesses

  • Economic entities that
  •  Purchase factors of production in the resource

Product market

  • Where the goods and services produced by businsses are bought and sold
  • Households ue

Factor market

  • Where households sell resources to businesses
  •  Households sell resources to generate income
  •  Businesses buy resourse to gene4
  1. Economic systems
  1. Characteristics of the market system
  1. Five fundamental questions
  1. The invisible hand
  1. The circular flow model
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