1 / 25

ECON 201

ECON 201. Chapter 2 The Market System and the Circular Flow. Learning Objectives. Command Systems vs. Market Systems Characteristics of a Market System How Markets Determine What to Produce, How to Produce, and Who Receives the Output

jonathans
Download Presentation

ECON 201

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ECON 201 Chapter 2 The Market System and the Circular Flow

  2. Learning Objectives Command Systems vs. Market Systems Characteristics of a Market System How Markets Determine What to Produce, How to Produce, and Who Receives the Output How Market System Adjusts to Change and Promotes Progress The Circular Flow

  3. The Command System Also known as: socialism or communism Government owns most (sometimes all) of the businesses. A ‘central body’ makes all the production decisions Capital is allocated centrally

  4. The Market System Also known as: capitalism or the bitchin system! Different levels of capitalism that is used all over the world The government does play a role, but the central role in all market systems is played by….the market!

  5. Private Property Owning your own property is key to a market system. People must be free to do whatever they want with their stuff, and a legal mechanism must be in place to instill confidence in owners Property rights facilitate ‘exchange’ Confident in ownership, owners can now use their time and resources to ‘produce’ rather than ‘protect’.

  6. Freedom of Enterprise and Choice Freedom of enterprise: people can obtain and use resources to produce what they want Freedom of choice: people can use or dispose of what they want, they can work where they want, they can move where they want. But although people have the freedom to choose what they want, they will have to pay the price for their choices.

  7. GLOBAL PERSPECTIVE Comparison of countries Free Mostly Free Mostly Unfree Repressed 1- Hong Kong 3- Ireland 9- United States 22- Belgium 33- Spain 44- France 81- Brazil 111- China 122- Russia 150- Cuba 152- Venezuela 157- North Korea

  8. Self-Interest “Self-centered” is a term that I have always believed was a negative term…but not in econ. Self-interest is what motivates people to exercise their freedom of choice. Everyone tries their hardest to choose what is best for them. Self-interest is what allows us to avoid chaos.

  9. Competition • Competition requires: • 2 or more buyers/sellers acting independently • Freedom of sellers and buyers to enter or leave the market if they want. • The more buyers/sellers there are, the greater competition you have. • Competition limits the abuse of power that a single buyer/seller can have.

  10. Markets & Prices Markets bring buyers and sellers together to ‘negotiate’ deals. Imagine a vegetable market where sellers and buyers are yelling back and forth, all at the same time, trying to negotiate deals. Because of the 2 freedoms, buyers or sellers can simply pack up and leave if they want.

  11. Technology & Capital Goods Because everyone is free to do what they want, those who do it best are rewarded. Technology advances can give buyers or sellers the advantage. Farmers can now produce more food with machinery than with their bare hands. Also, those with greater access to the capital they need have the advantage.

  12. Specialization Specialization is critical for a market to be the best that it can be. Consumers produce virtually NONE of the goods they consume or consume much of what they produce. A farmer will sell milk to the dairy, then buy butter from the store. We learned a looooong time ago that producing everything you need is inefficient.

  13. 2 key parts of specialization: • Division of labor: • the car repairman seeks legal advice from the lawyer, and the lawyer will get his oil changed with the car repairman. • By dividing the work, we can become more skilled at what we do. • Geographic Specialization: • We grow corn in the midwest, and we grow oranges in Florida. • Bananas are grown in Honduras and cars are made in Germany.

  14. Use of money Money is what we use to exchange in the market. We don’t ‘barter’ anymore. We don’t exchange a chicken for a hammer. Money only has value if everyone in the market thinks that it has value. If everyone thought that buttons were more valuable than coins, then buttons would be what we used at the store.

  15. Active by limited government Even though the market system has a high degree of efficiency in the use of its resources, there are some ‘failures’. An active, but limited, government is in place to solve those failures in market economies.

  16. 5 fundamental questions that market economies MUST answer

  17. #1: What will be produced? Whatever can produced a profit with be produced, whatever can’t…will go away. “Consumer sovereignty” means that the buyers answer this question with their “dollar votes”. Whatever they spend their money on, wins!

  18. #2: How will it be produced? With multiple sellers in a market, whomever produces the most efficiently, and provides a product that most people want, will win. Those sellers that don’t do it as well, will constantly strive to change and become like the seller that is doing it the best. If they don’t change, they die.

  19. #3: Who will get the output? The only ones who will get the output that the sellers provide are those buyers who are willing to pay the price that is offered. Also, the only ones who will get the output are those who have the resources (money) to purchase it. If you have no buyers for your product, you will die.

  20. #4: How will the system accommodate change? Consumer tastes change. Regular bottled water isn’t cool anymore… now people want flavored water, vitamin water, etc. If you make regular bottled water and you can’t change your product to give people what they want, you die.

  21. #5: How will the system promote progress? Creative destruction: new products that enter the market that make current products obsolete. Ex: vinyl records vs CDs Those who don’t change with the times, die. Those who accumulate capital (money, equipment, people, etc) build for the future so they can be ready to adjust for change.

  22. Adam Smith’s “Invisible Hand” “Firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system, will simultaneously , as though guided by an ‘invisible hand’ promote the public and social interest.” Basically, just let the market do its thing, and everyone will be better off.

  23. Why are ‘command’ economies failing all over the planet? USSR East Germany Yugoslavia • 2 basic problems • Coordination problem: economies eventually get so large that nobody can provide enough planning • Incentive problem: workers have no incentive for doing a good job. They are simply expected to meet a certain production goal.

  24. The Circular Flow model

  25. End

More Related