The Market System and Circular Flow
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| Economic System | Particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem
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| Laissez-Faire Capitalism | Economic system in which the government's economic role is limited to protecting private property and establishing a legal environment
Only mutually agreeable transactions
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| Command System | Method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities
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| Market System | Economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanisms used to allocate those resources
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| Market System Categorization | Mixture of centralized government economic initiatives and decentralized actions taken by individuals and firms
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| Markets | Any institution or mechanism that brings together buyers and sellers of a particular good or service
Participants act in own self interest
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| Private Property | Right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property
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| Market System Characteristics | Private property, freedom of enterprise and choice, self-interest, and competition
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| Freedom of Enterprise | Freedom of firms to obtain economic resources, use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice
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| Freedom of Choice | Freedom of owners of property resources to employ or dispose of them as they see fit
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| Self-Interest | That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain
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| Competition | Effort or striving between two or more independent rivals to secure the business of one or more third parties by offering them the best possible terms
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| Competition Requirements | Two or more buyers and two or more sellers acting independently in a particular market
Freedom of sellers and buyers to enter and exit markets on basis of economic self interest
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| Technology and Capital Goods | Market system encourages extensive use and rapid development of complex capital goods
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| Specialization | Use of resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services
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| Division of Labor | Separation of the work required to produce a product into a number of different tasks that are performed by different workers
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| Specialization and Total Output | Specialization increases total output society derives from limited resources
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| Medium of Exchange | Any item sellers generally accept and buyers generally use to pay for a good or service
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| Money | Any item that is generally acceptable to sellers in exchange for goods and services
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| Consumer Sovereignty | Determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy
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| Dollar Votes | "votes" that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available
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| Invisible Hand | If you leave the economy alone, it will regulate itself and will promote self interest of all parties
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| The Coordination Problem | Problem coordinating all of the millions of individual decisions taking place in the economy
Lead to shortages
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| Incentive Problem | Misjudgment of how many of each good was wanted at government determined prices
Persistent shortages and surpluses
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| Demise of Command System | Coordination Problem
Incentive Problem
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| Circular Flow Diagram | Illustration showing flow of resources from households to firm and of products from firms to households
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| fHouseholds | Economic entities that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants
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| Businesses | Economic entities (firms) that purchase resources and provide goods and services to the economy
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| Sole Proprietorship | Business owned and managed by a single person
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| aPartnership | Two or more individuals agree to own and operate a business together
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| Corporation | An independent legal entity chartered by a state or the federal government that is distinct and separate from the individuals who own it
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| Product Market | A market in which products are sold by firms and bought by housholds
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| Resource Market | A market in which households sell and firms buy resources or the services of resources
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| How Market System Deals with Risk | Profit-Loss System
Risk Management
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| Residual Claimants | Economic agent who receives (is claimant to) whatever profit or less remains at a firm after all other input providers have been paid
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| Benefits of Restricting Business Risk to Owners | Attracting Inputs
Focusing Attention
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Created by:
Eliana.s
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