2.2 Characteristics of the Market System

What does private property mean in a market system?

Individuals and businesses own resources and can use or trade them freely. It encourages fair exchange and protects ownership.

How do property rights support economic exchange?

They ensure people must offer something valuable in return—leading to mutually beneficial transactions.

What are the benefits of property rights?

• Encourage investment and innovation

• Motivate owners to maintain/improve property

• Reduce time spent protecting assets

• Protect intellectual property (patents, copyrights)

What do freedom of enterprise and choice allow?

• Businesses can produce and sell what they want

• People can choose jobs, spend money, and buy goods freely (within legal limits)

What role does self-interest play in the market system?

It motivates individuals to pursue their goals—like profit, satisfaction, or low prices—creating order in the economy.

Why is competition important in a market system?

• Prevents price control

• Encourages efficiency

• Allows entry/exit from markets

• Limits abuse of power

How do markets and prices coordinate economic activity?

They reflect consumer demand and production costs, guiding decisions and rewarding responsiveness.

Why are capital goods important in production?

They increase efficiency—advanced tools and machines allow more output than basic methods.

What is specialization in economics?

Focusing on producing one or a few goods efficiently, then trading for others.

How does division of labor improve productivity?

• Uses individual talents

• Improves skill through repetition

• Saves time by avoiding task-switching

What is geographic specialization?

Regions produce goods suited to their environment and trade with others for efficiency.

Why is money better than barter?

It avoids the need for a “coincidence of wants” and makes trade easier and more flexible.

What is the role of government in a market system?

To fix market failures and improve efficiency—while avoiding misallocation of resources

How do legal contracts relate to private property?

They allow individuals and businesses to make binding agreements, supporting secure and voluntary exchange.

What are market failures?

Situations where the market system doesn’t allocate resources efficiently—like pollution or monopolies.

What is government failure?

When government intervention causes misallocation of resources or inefficiency.

Why does the market system encourage innovation?

Innovators earn rewards directly, motivating them to create new products and technologies.

How do capital goods improve efficiency?

They replace inefficient direct methods—like using machines instead of manual labor.

What is the “coincidence of wants” problem in barter?

Trade only works if both parties want what the other offers—money solves this issue.

What does "division of labor" mean in economics?

It’s when individuals focus on specific tasks based on their skills, increasing efficiency and output.

How does specialization use differences in ability?

People do what they’re best at—like athletes playing sports or artists performing—making the most of their talents.

How does specialization improve skill?

Repeating a task helps people master it—like lawyers improving through practice and study.

How does specialization save time?

It avoids switching between tasks and fumbling with unfamiliar work—leading to faster, smoother production.

What is the result of human specialization for society?

It increases total output by using limited resources more efficiently.