PART 1: AN INTRODUCTION TO ECONOMICS AND THE ECONOMY · LO2.2 4 •Private property •Freedom of...
Transcript of PART 1: AN INTRODUCTION TO ECONOMICS AND THE ECONOMY · LO2.2 4 •Private property •Freedom of...
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1
Slides prepared by Bruno Fullone, George Brown College
© 2010 McGraw-Hill Ryerson Limited
CHAPTER 2 The Market System
and the Circular Flow
PART 1: AN INTRODUCTION TO
ECONOMICS AND THE
ECONOMY
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2
• Learning objective 2.1: The difference between a command system and a market system
• Learning objective 2.2: The main characteristics of the market system
• Learning objective 2.3: The five fundamental questions any economy faces
• Learning objective 2.4: About the demise of the command economy
• Learning objective 2.5: The mechanics of the circular flow model
In This Chapter You Will Learn:
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3 LO2.1
Economic Systems
A particular set of institutional arrangements and a coordinating mechanism
- The command system
- The market system
2.1 Economic Systems
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4 LO2.2
• Private property
• Freedom of enterprise & choice
– freedom of enterprise: businesses can buy & sell as they choose
– freedom of choice:
• owners can use or sell property as they choose
• workers can work where they like
• consumers can buy what they want
2.2 Characteristics of the Market
System
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5 LO2.2
• Private property
• Freedom of enterprise & choice
• Self-interest
– businesses seek profits
– consumers seek value
2.2 Characteristics of the Market
System
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6 LO2.2
• Private property
• Freedom of enterprise & choice
• Self-interest
• Competition
– independently acting sellers & buyers
– easy entry & exit
• Markets and Prices
– prices signal scarcity & guide resource allocation
2.2 Characteristics of the Market
System
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7 LO2.2
Other Characteristics
• Technology & Capital Goods
• Specialization
– division of labour
–ability differences
– learning by doing
–saving time switching tasks
– geographic specialization
2.2 Characteristics of the Market
System
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8 LO2.2
Other Characteristics
• Technology & capital goods
• Specialization
• Use of money
– Medium of exchange
• Active, but limited government
2.2 Characteristics of the Market
System
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9 LO2.3
1. What will be produced?
-those goods & services that can be produced at a profit
-what consumers vote for with their dollars
-market restraints on freedom
Consumer Sovereignty
2.3 Five Fundamental Questions
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10 LO2.3
1. What will be produced?
2. How will the goods & services be produced?
-with the most efficient, least-costly methods
2.3 Five Fundamental Questions
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11 LO2.3
1. What will be produced?
2. How will the goods & services be produced?
3. Who will get the goods & services?
-those with the greatest willingness & ability to pay
2.3 Five Fundamental Questions
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12 LO2.3
1. What will be produced?
2. How will the goods & services be produced?
3. Who will get the goods & services?
4. How will the system accommodate change?
-by responding to price & profit signals
2.3 Five Fundamental Questions
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13 LO2.3
1. What will be produced?
2. How will the goods & services be produced?
3. Who will get the goods & services?
4. How will the system accommodate change?
5. How will the system promote progress? -Technological advance
-Capital accumulation
2.3 Five Fundamental Questions
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14 LO2.3
• Prices communicate information about scarcity & value
• Competition forces producers & resource suppliers to respond
• Firms, acting in their own best interest, also promote society’s interests in terms of efficiency
The “Invisible” Hand
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15 LO2.3
Three special merits of the market system:
• Efficiency
• Incentives
• Freedom
The “Invisible” Hand
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16 LO2.4
• The Coordination Problem
• The Incentive Problem
2.4 The Demise of the
Command System
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LO2.5 17
Factor
MARKET
FACTORS
OF PRODUCTION INPUTS
BUSINESSES HOUSEHOLDS
The Circular Flow Diagram
Figure 2-2
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LO 2.5 18
GOODS &
SERVICES GOODS &
SERVICES
BUSINESSES HOUSEHOLDS
FACTOR
MARKET
PRODUCT
MARKET
INPUTS FACTORS
OF PRODUCTION
The Circular Flow Diagram
Figure 2-2
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19 LO2.3
• If one thoroughly shuffles a deck of cards, there is a virtual 100% chance that the resulting arrangement of cards will be unlike any previous arrangement.
• Yet, even though there are tens of billions of resources in the world, these resources are arranged in such a way as to produce the
products and services that serve human needs.
The Last Word: Shuffling the Deck
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20 LO2.3
• Private property eliminates the possibility that resource arrangements will be random because each resource owner will choose a particular course of action if it promises rewards to the owner that exceed the rewards promised by all
other available actions.
• The result is a complex and productive arrangement of countless resources.
The Last Word: Shuffling the Deck
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21 Chapter 2
2.1 The difference between a command system and a market system
2.2 The main characteristics of the market system
2.3 The five fundamental questions any economy faces
2.4 The demise of the command system
2.5 The mechanism of the Circular Flow model
Chapter 2 Summary