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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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