Presentation is loading. Please wait.

Presentation is loading. Please wait.

By Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1.

Similar presentations

Presentation on theme: "By Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1."— Presentation transcript:

1 By Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1

2 All societies have economic systems. Economic systems differ in two important ways: 1. who owns the factors of production 2. the method used to coordinate economic activity. 2

3 1. The command system 2. The market system 3

4 A. Private Property B. Freedom of enterprise & choice C. Self-interest D. Competition E. Markets & prices F. Reliance on technology & capital goods G. Specialization H. Use of money I. Active but limited government 4

5 Property owners have rights: control, employ, dispose of, and bequeath property. Rights extend to intellectual property through patents, copyrights, and trademarks. 5

6 1.Freedom of enterprise means entrepreneurs and businesses have the freedom to obtain and use resources, to produce products of their choice, & to sell these products in the markets of their choice. 2.Freedom of choice means: a.Owners of property and money resources can use resources as they choose. b.Workers can choose the training, occupations, and job of their choice. c.Consumers are free to spend their income in such a way as to best satisfy their wants. 6

7 a. Self interest is one of the driving forces in a market system. b. As each agent tries to maximize profits, income & satisfaction, the economy will benefit if competition is present. 7

8 Large numbers of sellers mean that no single producer or seller can control the price or market supply. Large number of buyers means that no single consumer or employer can control the price or market demand. Depending upon market conditions, producers can enter or leave industry easily. 8

9 A market is an institution or mechanism that brings buyers and sellers into contact. Individual decisions by buyers and sellers in the market determine the product and resource prices that, in turn, guide further decisions by resource owners, producers, and consumers. Those who respond to the market signals will be rewarded with profits and income. 9

10 1.Firms are motivated invest in leading edge technology & capital goods for efficiency & greater output. 2. Competition, freedom of choice, self- interest, and the potential of profits provide the incentive for capital accumulation (investment). 10

11 Definition: the use of the resources of an individual, a firm, a region, or a nation to produce one or a few goods & services. Division of labour is important. What are the benefits of specialization? 11

12 1. Money is more efficient than barter. Allows for multilateral trades Money wages are more efficient 2. Foreign exchange markets allows easy international trade. 12

13 The market system promotes efficiency, but it has certain shortcomings over production of goods with social costs under production of goods with social benefits tendency for business to increase monopoly power macro instability 13

14 Must be answered by all economic systems: 1.What goods and services will to be produced? 2.How will the goods and services be produced? 3.Who will get the output? 4.How will the system accommodate change? 5.How will the system promote progress? 14

15 Consumer sovereignty Dollar votes Businesses are not really free to produce what they wish. 15

16 Least costs production Production techniques include: Optimum location Resource productivity Transportation costs Available technology Resource prices The most efficient technique: the one that produces a given amount of output with the smallest input of resources. 16

17 To those who are willing and able to pay for them. Depends on: distribution of income tastes & preferences of consumers 17

18 The guiding function of prices is essential to a well- functioning market system. 18

19 Firms & entrepreneurs are rewarded with increased revenue & profits for successful changes. Creative destruction occurs when new products and production methods destroy the market positions of firms that are not able or willing to adjust. Competition promotes progress. 19

20 Competition is the mechanism of control for the market system: guarantees that industry responds to consumer wants forces firms to adopt the most efficient production techniques 20

21 Concept of the invisible hand by Adam Smith public interest is promoted through a market system where the primary motivation is selfinterest. by attempting to maximize profits, firms will also be producing the goods and services most wanted by society…thus is best public interest. 21

22 The failure of command systems can be attributed to two main problems: 1. Coordination problem 2. Incentive problem 22



25 What are the limitations to the model? 25

Download ppt "By Laura Lamb & material from McConnell, Brue, Flynn & Barbiero 1."

Similar presentations

Ads by Google