In a market system scarce goods are allocated through the operation of...
Market prices that are determined by consumers and producers acting in their own self-interest. Participants act in their own self-interest and seek to maximize satisfaction or profit through their own decisions regarding consumption or production. Goods and services are produced and resources are supplied by whoever is willing to do so. The result is competition and widely dispersed economic power.
Characteristics of the Market System
Freedom of enterprise and choice
Market & Prices
Characteristics of a Command System
Known as socialism or communism
Decisions made by a central planning board.
In a command economy scarce goods are allocated by...
a government-appointed planning board based on the board's long-term priorities.The command economy is characterized by public ownership of nearly all property resources, and economic decisions are made through central planning. The planning board, appointed by the government, determines production goals for each enterprise. The division of output between capital and consumer goods is centrally decided based on the board's long-term priorities
"Division of Labor"
Specialize in tasks that take advantage of their individual abilities and skills.
When resources are specialized, exchange is necessary to obtain the goods and services one needs.
Why does the market system causes the economy to conserve most in the use of resources that are particularly scarce in supply.
Increasing scarcity of a resource causes its price to rise. Firms ignoring higher resource prices will become high-cost producers. Firms switching to the less expensive inputs become lower-cost producers and earn higher profits than high-cost producers. The market system, therefore, forces producers to conserve on the use of highly scarce resources.
What are the five fundamental questions?
1.What does the economy produce? Whatever people are willing to buy.
2.How does the economy produce it? The most efficient/cheapest way.
3.Who gets the goods? Whoever wants it and can afford it.
4.How do we promote change? Through self-interested innovators and inventors.
5.How do we promote progress? Through self-interested entrepreneurs and politicians.
Determinants of Demand
Income, price of related goods, taste and preferences, number of consumers, expectations