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
Socialism/ Communism, Government owns most property resources and economic decision making through a central economic plan (North Korea, Cuba)
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
Incentive to make things more valuable if we own it
"What is best for me"
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
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
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?
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