1. Macroeconomics Chapter 4
The Market System

2. Characteristics of the Market System

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

4. 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

5. 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

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

7. 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

8. Markets and Prices
Determines prices of resources and products

9. 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

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

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

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

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

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

15. 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

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

17. The Market System at Work

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

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

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

21. 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

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

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

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

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

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

27. Competition and the “Invisible Hand”

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

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

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