Chapter 2: The Market System

Economic system

Rules responding to economizing problems

Base on: who owns the factors of production and the direct economic activity

Command system

Gov controls most of the resource

Main success are from quotas of what they produce

Ex: is North Korea

Pros of having a Command Economy:

Universal healthcare

No unemployment

Market is stable-set prices

No social classes

Cons of having Command Economy:

No Competition

Leads to inefficiency

causes shortages

no individual freedom

Market system

Private Ownership

ex: US

Acting on their own self-interest, which is competition

PRIVATE PROPERTY: resources and goods are owned by the individual or busniess not the government

Pros of having a market system

Competition: rivalry between businesses or sellers to attract customers

Supply and demand-more effiicient

Cons of have Market system

wealth is uneven

high risk of poverty

small percent of people become very powerful

Division of Labor

Breaking down complex into smaller step so each worker specializes in one task

Society output

Freedom of choice

Consumer and produces can make their own economic decision about what to buy, sell, or produce

Allow workers to entrer any line of wokr they qualified in

Self-interest

People make decision based on what benefits them most

Market

Any place or system where buyers and seller come together to exchange goods, services, or resources

Freedom of enterprise

Role of entrepreneurs in a market system

Main driving force in a market economy

Specialization

Use of resources of individuals to produce one or few goods rather than entire range of goods

increases productivity and efficenty, allowing resources to be used where they are most effective

Medium of exchange

something that buyers and sellers accept as payment for goods and services

makes transactions easier

Barter

Swapping goods for goods

Money

Needed to generally acceptable to seller in exchange for goods and services

Consumer sovereignty

Consumers “rules” the market by determine what goods and services are produced through their spending choices

Dollar votes

when consumers spend money on goods and services, they are “voting” for what should be produce

Creative Destruction

New innovation that replace old thing, which can destroy old busniess bu create growth

Invisible Hand

People make choices on their own self interest that accidentally help society

Self-interst+competition=benefits society

Resources Market

The market where households sell resources (factors of production)  to businesses, and business buy those resources

Produce Market

The market where household buy goods and services from businesses