1. The Market System and Circular Flow ECO 2013 Chapter 2 Prof. Maria Mari 2007

2. Economic Systems A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problems.

3. Determines What goods are produced? How they are produced? Who gets them? How to accommodate change? How to promote technological progress?

4. Economic Systems differ Who owns the factors of production The method used to motivate, coordinate, and direct economic activity They answer the economic questions

5. Economic Systems Market System or Pure Capitalism  Characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets.  No government intervention in the economy  Adam Smith

6. Characteristics of Market System Private property  Encourage Investment Innovation Exchange Maintenance of property Economic growth Freedom of enterprise and choice Competition Market and prices Technology and capital goods Specialization Division of labor Use of money Active but limited government.

7. Five Fundamental Questions 1. Which specific goods and quantities will be produced? must make profit consumer sovereignty 2. How will the goods and services be produced? 1. Combination of technology and resources 2. Capital intensive or labor intensive 3. Who will get the output?

8. Continued 4. How will the system accommodate change? 5. How will the system promote progress? 1. Technological advance 2. Capital accumulation 3. Economic growth

9. Economic System Pure Command System  An economic system characterized by the public ownership of resources and centralized planning  Government intervention in all areas  Karl Marx  North Korea and Cuba

10. Economic System Mixed Economy  An economic system characterized by private ownership of some resources and the public ownership of other resources.  Some markets unregulated  Some markets regulated.

11. Answers to Questions QuestionCapitalismCommandMixed What goods & services will be produced? Producers/ consumers GovernmentProducers. Consumers, and government How will goods & services be produced? Technology and consumer wants GovernmentTechnology, consumer wants, and government For whom will goods & services be produced? Good rationed by price GovernmentGood rationed by price and may be regulated by government

12. Economic Decision Makers Households  Supply labor, capital, natural resources Business Government  Demand resources that households supply There interaction determines how an economy’s resources are allocated

13. Goods and Services Resources are combined in a variety of ways to produce goods and services  Good – a tangible item  Service – an activity Scarce if the amount people desire exceeds the amount available at a ZERO price

14. Economic Decisions Makers Markets  A set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms.  Product Goods or services bought and sold  Resource Resources or services of a supplier are bought and sold

15. Circular Flow Model Households Firms $$$ Product Resource $$ Labor, capital, land Goods and services Goods Labor, capital, and land