Chapter 2
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Created by:
ebcunningham on September 8, 2010
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22 terms
Terms | Definitions |
|---|---|
 Economic System | Set of institutional arrangements and a coordinating mechanism, Determines what goods are produced how they are produced, who gets them, how to accommodate change, and how to promote technological progress |
| Command System | Socialism/ Communism, Government owns most property resources and economic decision making through a central economic plan (North Korea, Cuba) |
| Market System | Capitalism, Private ownership of resources and use of markets and prices to coordinate and direct economic activity (Hong Kong) |
| Characteristics of a Market System | Private Property, Freedom of enterprise and choice, Self-Interest, Competition, Markets and Prices, Technology and Capital Goods, Specialization, Use of Money, Active but Limited Government |
| Private Property | Incentive to make things more valuable if we own it |
| Self-Interest | "What is best for me" |
| Competition | Always has producers striving to improve and recreate products; Lower Prices |
| Markets and Prices | Prices are a signal to businesses of the success of their product |
| Specialization | allows things to be done faster, better, and cheaper |
| Division of Labor | If someone is good and experienced at something and loves to do it, they will do it better and more efficiently than anyone else |
| Geographic Specialization | Ex: Certain crops can only be grown in certain regions Ex2: Cruise ship manufacturers would manufacturer ships closer to water |
| Use of Money | Money is used instead of bartering Problem with Bartering: "Coincidence of Wants"- I have to have what you want, and you have to have what I want |
| Active, Limited Government | Regulations protect consumers and producers, Limited involvement though as to not control EVERYTHING |
| Market System Questions | What will be produced? How will goods be produced? Who gets the output? How is change accommodated? How is progress promoted? |
| What will be produced? | Consumer sovereignty: when consumers buy or don't buy, we tell producers what we want; We vote with our dollars |
| How will goods be produced? | Technology, Resources cost: lowest cost wanted |
| Who gets the output? | Willingness to pay and ability to pay |
| How is change accommodated? | Self-interest |
| How is progress promoted? | Technological advance (8 Track - Ipod); Capital Accumulation |
| Wealth of the Nations by Adam Smith | Market systems grow economies; Unity of private and soul interest; Invisible hand enables economy to let complexity get in the way |
| Virtues of the Market System | Efficiency Incentives Freedom |
| Disadvantages of the Command System | Motivation is lacking: No extra pay or bonus for extra work, no incentive to work harder Coordinating Problem: no back up plan, if you wait on a supplier for products to produce your own product and he can't follow through, there is no other supplier to turn to |
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