1. The Market System
Chapter 4
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2. Characteristics of a Market System
Private Property
Freedom of Enterprise and Choice
Self-Interest
Competition
Reliance on Technology & Capital Goods
Specialization
Use of Money
Active, but Limited, Government
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3. Private Property
Individuals & firms (not government) own most of the property resources.
Property rights encourage investment, innovation, exchange, maintenance of property, and economic growth.
Patents, Copyrights, & Trademarks
Resources meaning labor, land, capital, etc.
If you are a business owner and you know that you will be rewarded for being innovative and/or selling something of value to the customer, then you will sell that item.
These are protected under private property as well. This encourages people to invent new products and production processes without fear that others will steal them.
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4. Freedom of Enterprise & Choice
Enterprise – ensures business owners the right to use resources to produce items that can be sold.
Choice – enables owners to employ or dispose of their property and money as they see fit.
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5. Self-Interest Each economic unit tries to do what is best for itself.
Involves maximizing some benefit.
i.e. entrepreneurs try to maximize profit or minimize loss. Property owners try to get the highest price for the sale of their property. Workers try to maximize their utility by finding jobs that offer the best combination of wages, hours, fringe benefits, and working conditions.
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6. Competition Requires:
Independently acting sellers & buyers operating in a particular product or resource market.
Freedom of sellers & buyers to enter or leave markets on the basis of their self-interest.
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7. Reliance on Technology & Capital Goods
The market system encourages extensive use and development of capital goods: tools, equipment, etc.
2. The most direct methods of production are often the least inefficient.
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8. Specialization Also known as “division of labor”
Specialization makes use of differences in ability
Specialization fosters learning by doing
Specialization saves time
2. Enables individuals to take advantage of existing differences in their abilities and skills.
3. By devoting all your time to a single task, you are more likely to develop skills and improve your productivity.
4. Less time is wasted going from one job to another.
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9. Geographic specialization
Certain regions produce things for which their resources are best suited.
By specializing, you can produce “more” of things you can make efficiently and trade with other countries for things that they are good at.
That’s the reason that NAFTA & the EU were developed
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10. Use of Money Functions: Medium of exchange- it makes trade easier
Exchange can, and sometimes does occur through barter (swapping goods for goods).
Barter requires a coincidence of wants
2. Barter requires that the buyer and seller wants what the other is offering.
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11. Active, but Limited, Government
Government can increase the overall effectiveness of the economic system.
Use of fiscal policy (taxation or government spending) to regulate the economy.
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12. The Market System at Work
Four Fundamental Questions
What goods & services will be produced?
How will the goods & services be produced?
Who will get the goods & services?
How will the system accommodate change?
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13. What will be produced? Businesses seek profits and avoid losses
Economic profit= total revenue – economic costs
1. Things that are produced at a profit will be produced.
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14. Economic Costs & Profits
Economic Costs- payments that must be made to secure and retain needed amounts of resources.
Normal Profit = Total Revenue – (Economic Costs + Entrepreneur’s Contributions)
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15. Expanding & Declining Industries
Expanding- When industries experience economic profit, new firms enter
Declining- unprofitable industries…firms leave these types of industries
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16. Consumer Sovereignty & Dollar Votes
Consumer sovereignty- consumers spend their income on things they are willing & able to buy.
Dollar Votes- by spending their money, consumers are stating their demand.
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17. Market Restraints on Freedom
Consumers’ buying decisions make production of some products profitable and others unprofitable
Businesses must match their production choices with consumer choices or risk facing losses
Derived demand- demand for resources is derived from demand for goods & services they help produce
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18. How will the goods & services be produced?
Producing products in the least costly way.
The most efficient production technique depends on:
Available technology
Prices of needed resources
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19. Who will get the goods & services?
Consumers that are willing and able to buy the product
Ability to pay depends on income and preferences for those goods.
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20. How will the system accommodate change?
Guiding function of prices
Technological advance
Through changes in prices it communicates changes in such basic matters as consumer tastes and elicits responses from businesses and resource suppliers. By affecting product prices and profits, changes in consumer tastes direct the expansion of some industries and the contraction of others.
Includes new & improved methods that reduce production or distribution costs. By passing part of its cost reduction on to the consumer through a lower produce price, the firm can increase sales and obtain profit at the expense of rival firms.
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21. Competition & the “Invisible Hand”
Firms seeking to further their own self-interest are guided by an “invisible hand” which promotes the public or social interest.
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