Transcript
PART 1: AN INTRODUCTION
TO ECONOMICS
AND THE ECONOMY
Prepared by Dr. Amy Peng
Ryerson University
©2013 McGraw-Hill Ryerson Ltd.
Differentiate between a command system and a market system
List the main characteristics of the market system
Explain how the market system decides what to produce, how to produce it, and who obtains it.
Discuss how the market system adjust to change and promotes progress.
Describe the mechanics of the circular flow model.
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Economic System
A particular set of institutional arrangements and a coordinating mechanism for producing goods and services.
The Commend System
Most property resources are owned by the government.
Economic decisions are made by a central government body.
The Market System
Property resources are privately owned.
markets and prices are used to direct and coordinate economic activities.
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Private property
The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
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Freedom of enterprise and choice
Freedom of enterprise: businesses can buy and sell as they choose
Freedom of choice:
owners can use or sell property as they choose
workers can work where they like
consumers can buy what they want
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Self-interest
Entrepreneurs try to maximize profit or minimize loss.
Property owners try to get the highest price for the sale or rent of their resources.
Workers try to maximize their utility (satisfaction) by finding jobs that offer the best combination of wages, hours, fringe benefits, and working conditions.
Consumers try to obtain the products they want at the lowest possible price and apportion their expenditures to maximize their utility.
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Competition
Independently acting sellers and buyers operating in a particular product or factor market
Freedom of sellers and buyers to enter or leave markets, on the basis of their economic self-interest
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Free
1 Hong Kong
3 Australia
6 Canada
Mostly Free
9 United States
20 Japan
31 Spain
Mostly Unfree
113 Brazil
135 China
143 Russia
Repressed
171 Iran
175 Venezuela
179 North Korea
Markets and Prices
A market is an institution or mechanism that brings buyers (“demanders”) and sellers (“suppliers”) into contact.
The coordinating mechanism of capitalism is a system of markets and prices.
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Technology and Capital Goods
Extensive use of technologically advanced capital goods helps market economies achieve greater efficiency in production.
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Specialization
Division of labour
ability differences
learning by doing
saving time switching tasks
Geographic specialization
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Use of money
FIGURE 2-1 Money Facilitates Trade When Wants Do Not Coincide
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Active, But Limited, Government
Market failures
The central government, along with the central bank, needs to take action if a market economy is experiencing recession or inflation.
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What will be produced?
The goods and services that can be produced at a profit
Dollar votes
Consumer Sovereignty
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How Will the Goods and Services Be Produced?
Minimize the cost per unit by using the most efficient techniques
Technology
Prices of the necessary resources
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Who will get the output?
Consumers with the ability and willingness to pay will get the product
Ability to pay depends on income.
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How Will the System Accommodate Change?
Changes in consumer tastes
Changes in technology
Changes in resource prices
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How Will the System Progress
Technological advance
Creative destruction
Capital accumulation
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Prices communicate information about scarcity and value
Competition forces producers and resource suppliers to respond
Firms, acting in their own best interest, also promote society’s interests in terms of efficiency
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Three special merits of the market system:
Efficiency
Incentives
Freedom
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The Coordination Problem
The Incentive Problem
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FACTOR
MARKET
Households sell
Businesses buy
PRODUCT
MARKET
Businesses sell
Households buy
BUSINESSES
buy resources
sell products
HOUSEHOLDS
sell resources
buy products
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If one thoroughly shuffles a deck of cards, there is a virtual 100% chance that the resulting arrangement of cards will be unlike any previous arrangement.
Yet, even though there are tens of billions of resources in the world, these resources are arranged in such a way as to produce the products and services that serve human needs.
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Private property eliminates the possibility that resource arrangements will be random because each resource owner will choose a particular course of action if it promises rewards to the owner that exceed the rewards promised by all other available actions.
The result is a complex and productive arrangement of countless resources.
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2.1 The difference between a command system and a market system
2.2 The main characteristics of the market system
2.3 The five fundamental questions any economy faces
2.4 The demise of the command system
2.5 The mechanism of the Circular Flow model
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