Chapter 2
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Chapter 2. An Introduction to Economic Systems. System Structure. Command Economy Follows a central plan Uses laws to dictate economy Market Economy No centralized plan Economy based on millions of independent decisions. Market Economic System. Essential Features:

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Chapter 2

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Chapter 2

Chapter 2

An Introduction to Economic Systems


System structure

System Structure

  • Command Economy

    • Follows a central plan

    • Uses laws to dictate economy

  • Market Economy

    • No centralized plan

    • Economy based on millions of independent decisions


Market economic system

Market Economic System

  • Essential Features:

    • Private ownership of most businesses

    • Voluntary market exchanges

    • Allow for incentives

  • Relative Price

    • Price of one good in terms of another good


Opportunity costs

Opportunity Costs

  • Purchase decisions are made by weighing opportunity costs.

  • Relative prices can change

  • Example:

    • Concert Tickets or CD’s


Legal system

Legal System

  • Creation of Private Property Rights with ownership structures

    • Ex: Proprietorships, partnerships, and corporations.

  • Laws must be accepted, obeyed, and understood.

  • Individuals must trust each other


What does an economic system do

What does an Economic System Do?

  • Coordinates

    • Methods of Production

    • Quantities

    • Distribution

    • Stability

    • Growth


Specialization of labor

Specialization of Labor

  • Allows to become skilled at particular tasks.

  • Reduces time wasted

    • Mental shift

    • Switching materials

  • Increased innovation

  • Promotes trade

  • However, does lead to worker discontent


Price system supply

Price System - Supply

  • Quantity Supplied

    • Quantity a producer plans to sell at each possible price.

  • Supply Price

    • Minimum price a seller will accept for one additional unit of a good or service.

  • Law of Supply

    • Quantity supplied is positively related to its price.


Price system demand

Price System - Demand

  • Quantity Demand

    • Quantity a consumer is willing to buy at each price level.

  • Demand Price

    • Maximum price anyone will pay for a good.

  • Law of Demand

    • Quantity demanded is negatively related to its price.


Supply and demand

Supply and Demand

  • Market controlled by the plans of producers and consumers

  • Excess demand and excess supply counteract to reach equilibrium

    • Quantity demanded = quantity supplied


Equilibrium

Equilibrium

  • The essence of market coordination

  • Command economy uses laws to produce certain goods and services

  • Market Economy uses laws to establish rules of behavior.


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