PART 1: AN INTRODUCTION TO ECONOMICS AND THE · PDF fileThe Market System and the Circular...
Transcript of PART 1: AN INTRODUCTION TO ECONOMICS AND THE · PDF fileThe Market System and the Circular...
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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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• 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:
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
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
5 LO2.2
• Private property
• Freedom of enterprise & choice
• Self-interest
– businesses seek profits
– consumers seek value
2.2 Characteristics of the Market System
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
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
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
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
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
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
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
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
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
15 LO2.3
Three special merits of the market system:
• Efficiency
• Incentives
• Freedom
The “Invisible” Hand
LO2.5 17
FACTOR MARKET
FACTORS OF PRODUCTION
INPUTS
BUSINESSES HOUSEHOLDS
The Circular Flow Diagram Figure 2-2
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
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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• 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