Microeconomics Chap 2
Freedom of Enterprise
The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in markets of their choice:
all gov does for laissez faire
protect private property from theft, provide contract inforcement
invisible hand idea
virtues of the market system: efficiency, incentive, and freedom. unity of private and social interest.
Creative Destruction
"If you compare a list of today's most powerful and profitable companies with a similar list from 30 years ago, you will see lots of new entries:"
Invisible Hand
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest:"
Incentive Problem
"Managers in the old Soviet Union often sacrificed product quality and variety because they were being awarded bonuses for quantitative, not qualitative, targets:"
circular flow model
product market and resource market, the real flow and money flow
Economic systems
set of institutionalized arrangements, coordinating mechanism
Market System
some government control, most common system, private markets are dominant, self-interested behavior and market price
Coordination Problem
"Each day, central planners in the old Soviet Union were tasked with setting 27 million prices—correctly:"
wide variety of goods
because the individuals wants are diverse
negatives of command system
command system is a failure, no adjustments for shortages or surplus of goods, Soviet Union, china
the use of money
common value that makes buying and selling simpler than with bartering
Market
An institution that brings buyers and sellers together
Competition
The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the market as they each see fit
Private property
The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property
Differences in systems exist by
degree of decentralized use of markets and prices in decision making
barter
find a person who has something you want in return for something they want that you have
laissez faire capitalism
ideal economy, government doesnt interfere with economy
Mutually Agreeable
Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off
Freedom of Choice
The freedom of resource owners to dispose of their resources as they think best
Self Interest
What each individual or firm believes is best for itself and seeks to obtain
5 Fundamental Questions
What goods will be produced, how will they be produced, who will get them, how will the system accomodate change, and how will the system promote progress?
The command system
known as socialism or communism, government owns resources, government and boards make decisions regarding long-term priorities