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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

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.