Macroeconomics Chapter 4 The Market System

Characteristics of the Market System

Private Property Individuals right own most property resources, not the government

Freedom of Enterprise Ensures that businesses are free to obtain economic resources to produce their choice of goods and services to sell on the market

Freedom of Choice Enables owners to employ or dispose their property and money as they see fit Allows workers to enter any line of work Consumers are free to buy what they wish

Self-Interest Motivation force to do what is best for themselves

Competition Requires: Independently acting sellers and buyers “ The diffusion of economic power inherent in competition limits the potential abuse of that power.” Requires: Independently acting sellers and buyers Freedom of sellers and buyers to enter or leave markets

Markets and Prices Determines prices of resources and products

Reliance on Technology Market system encourages use and development of capital goods for the sake of profits and competition Roundabout production describes the ability of tools to produce goods in an easier way than without

Specialization Workers ability to receive a greater benefit from employment Jack-of-all trades are inefficient

Division of Labor 1/3 Specialization makes use of ability Takes advantage of skill sets

Division of Labor 2/3 Specialization fosters learning by doing Repetition of a single task will increase that skill

Division of Labor 3/3 Specialization saves time Shifting from one job to another wastes time

Geographic Specialization Producing products in lands most suited for production needs Example: Growing oranges in FL instead of PA

Major characteristic of a market system is the use of currency Use of Money Major characteristic of a market system is the use of currency

Active, but Limited, Government Essential to protect consumers from corrupt business practices

The Market System at Work

Four Fundamental Questions of the Market System 1/4 What goods and services will be produced? Economic profit = total revenue(TR) – total cost(TC)

Four Fundamental Questions of the Market System 2/4 How will the goods and services be produced?

Four Fundamental Questions of the Market System 3/4 Who will get the goods and services

Four Fundamental Questions of the Market System 4/4 How will the system accommodate change? Guiding function of prices Example: More demand for juice may raise price of fruit

Economic Costs and Profits Payments must be made to secure needed amounts of resources (Economic Costs)

Economic Costs and Profits Payment that covers land, labor, and capital (Normal Profit) Pure profit, all costs covered (Economic profit)

Profits and Losses Expanding industry Declining industry Faster growth + labor floods market = slower growth Declining industry Slower growth and limited labor or product

Consumer Sovereignty Consumer demand determines types of products Purchase resources and goods (Dollar Votes)

Market Restraints on Freedom Derived Demand: The demand for resources are derived from the products they produce

Competition and the “Invisible Hand”

Three Virtues of the Markey System 1/3 Efficiency Adoption most effective practices

Three Virtues of the Markey System 2/3 Incentives High skill levels rewarded with higher income Encourage labor to achieve innovation

Three Virtues of the Market System 3/3 Freedom!!! of choice of enterprise