Chapter 2: The Market System and the Circular Flow
freedom of enterprise
Ensures the entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services.
5 Fundamental Questions
1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will get the goods and services? 4. How will the system accommodate change? 5. How will the system promote progress?
laissez-faire capitalism
A hypothetical economic system in which a government's role would be restricted to protecting private property and enforcing contracts.
laissez-faire capitalism
A hypothetical economic system in which the government's economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets in which only mutually agreeable transactions take place between buyers and sellers. Sometimes referred to as pure capitalism. Keeps the government from interfering with the economy.
command system
A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; socialism and communism. The government owns most of the business firms, which produce according to government directives.
economic system
A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types. Can be classified by their degree of centralized or decentralized decision making.
market system
An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism. All the product and resource markets of a market economy and relationships among them.
self-interest
That which each firm, property owner, worker and consumer believes is best for itself and seeks to obtain.
market
Any institution or mechanism that brings together buyers and sellers of a particular good or service.
market system
Capitalism or mixed economy is a mix of decentralized decision making with some government control. A system found in much of the world. Private markets are a dominant force, private ownership of resources, and self-interested behavior.
command system
Known as socialism or communism. Government ownership of resources. Decisions are made by a central planning firm. North Korea, Cuba, and Myanmar. Restrict innovation, no motivation/incentives, not the most successful system.
Characteristics of the Market System
Private property, freedom of enterprise, freedom of choice, self-interest, competition, and market and prices.
Demise of the Command System
The coordination problem and the incentive problem.
competition
The effort and striving between two or more independent rivals to secure the business of one or more third parties by offering the best possible terms. Competition among buyers and sellers diffuses economic power throughout the economy.
freedom of enterprise
The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.
freedom of choice
The freedom of property owners to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their income in the manner that they prefer.
Characteristics of the Command System
The government owns most property resources and a central planning board makes all economic decisions concerning resources.
private property
The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property. Encourages people to cooperate by helping ensure that only mutually agreeable transactions take place. Also encourage investment, innovation, maintenance of property, and economic growth.
invisible hand
The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interest of society even which individual or firm is only attempting to pursue its own interests. Guides firms and resource suppliers to promote public or social interests even as they seek to further their own interests.
