Chapter 2: The Market System and the Circular Flow

economic system

a particular set of institutional arrangement and a coordinating mechanism

economic system

determines what goods are produced

economic system

determines how goods are produced

economic system

determines who gets the goods

economic system

determines how to accommodate change

economic system

determines how to promote technological progress

economic system

differs as to who owns the factors of production

economic system

differs as to the methods used to motivate, coordinate, and direct economic activity

laissez faire capitalism

the government intervention is minimal and markets and prices direct nearly all economic activity

laissez faire capitalism

government leaves entrepreneurs and businesspeople alone so they can make their own decisions

command systems

governments have total control over all economic activity

market system

an economic system where individuals own most economic resources, and markets and prices serve as the dominant coordinating mechanism used to allocate those resources

market system

all the product and resource markets of a market economy and the relationships among them

market system

characterized by centralized government economic initiative and decentralized actions taken by individuals and firms

market system

characterized by centralized government economic initiative and decentralized actions taken by individuals and firms

property rights

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 helping to ensure only mutually agreeable economic transactions take place

property rights

facilitate exchange

property rights

encourage investment, innovation, and economic growth

property rights

encourage owners to maintain or improve their property so as to preserve or increase its value

property rights

enable people to spend their time and resources increasing the production of goods and services instead of having to devote money and time to protecting and retaining the property they already possess

property rights

protect intellectual property through patents, copyrights, and trademarks

freedom of enterprise

freedom of firms to obtain economic resources, to use those resources to produce products of the firms’ own choosing, and to sell their products in markets of their choice

freedom of enterprise

ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of good s and services and to sell them in their chosen markets

freedom of choice

the freedom of owners of property to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in the manner they prefer

freedom of choice

allows workers to try to enter any line of work for which they are qualified

freedom of choice

allows owners to employ or dispose of their property and money as they see fit

freedom of choice

ensures that consumers are free to buy the good and services that best satisfy their wants and that their budgets allow

competition

the effort and striving between 2 or more independent rivals to secure the business of 1 or more 3rd parties by offering the best possible terms

competition

requires 2 or more buyers and 2 or more sellers acting independently in a particular product or resource market

competition

requires freedom of sellers and buyers to enter and exit markets

consumer sovereignty

the determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy

society

desires economic growth and higher standards of living

creative destruction

the creation of new products and production methods completely destroys the market positions of firms that are webbed to existing products and older ways of doing business

circular flow diagram

illustrates the flow of resources from households to firms and of products from firms to households

households

1 or more persons occupying a housing unit

businesses

commercial establishments that attempt to earn profits for their owners by offering goods and services for sale

product market

where households purchase the goods and services produced by businesses

resource market

where households purchases to businesses

counterclockwise flow

direction on the circular flow diagram that is paid for by the clockwise flow of money income and consumption expenditures