Macroeconomics chapter 2

Market economy

Relies primarily on buyers and sellers interacting in markets to allocate resources.

Command economy

relies on central planning. Government authorities take many decisions regarding production, resource allocation, and distribution.

Mixed economy

Markets play a major role, but government also participates in providing services, enforcing laws, and addressing market failures.

Efficiency

Using resoruces in a way that maximizes output and minimizes waste

Equity

The fair distribution of economic benefits and opportunities among individuals

Characteristics of a market system

Private property rights

Freedom of enterprise

Freedom of choice

Self interested behavior

Competition

Markets and prices

Specialization

Allows individuals, businesses, and regions to focus on activities in which they are relatively more productive.

Ex. of specialization

Division of labor within firms

Geographic specialization among regions

Productionmethods that increase efficiency

Technology

Helps businesses produce more output with available resources. Contribute to economic growth and high productivity

Money

Serves as a medium exchange and facilitates trade by eliminating many of the complications associated with barter

Governments

play an active but limited role in market economies

Government responsibilities

Protecting property rights

Enforcing contracts

Providing public goods and services

Addressing market failures

Promoting economic stability

What will be produced?

Which goods and services should be produced

How will they be produced?

Which resources and production methods should be used?

Who will receive the output?

How will goods and services be distributed among consumers?

How will the system accommodate change?

How will the economy respond to changes in consumer preferences, technology, and resource availability?

How will the system promote progress

How will innovation, investment, and economic growth occur?

The circular flow model

The circular flow model illustrates the interaction between households and business

Resource market

Households sell resources such as labor

Businesses purchase resources

Product market

Businesses sell goods and services

Households purchase goods and services

Benefits of the market system

Efficient allocation of resources

Incentives for innovation

Consumer choice

Economic freedom

Potential risks

Supply chain disruptions

Changes in consumer preferences

Business losses

Natural disasters and unexpected shocks