Microeconomics Chapter 2
Division of Labor
Makes use of differences in ability, fosters learning by doing, and saves time.
Total Revenue
Product x Quantity - Cost
Who are business risks restricted to?
owners
Differences in economic systems exist by
who owns the factors of production, what method is used to motivate, coordinate, and direct economic activity, and the degree of centralized government control.
Why are inputs easier to obtain?
Because many dislike risk
What will be produced?
- goods and services that create a profit - consumer sovereignty - dollar votes
How will the system change?
-Changes in the consumers taste -Changes in technology -Changes in resource prices -Prices help signal the changes
Private Property
-Freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, control, use, and dispose of this property. -Encourage investment, innovation, maintenance, and economic growth. -Intellectual property through patents, copyright, and trademarks.
Freedom of enterprise and choice
-Freedom to obtain and use resources, to choose products to make and markets to sell. -workers can choose their occupations. -Consumers are free to spend their income in such ways as to best satisfy their wants.
Circular Flow Model
-Households -Businesses: sole proprietorship, partnership, corporation. -Product market and the resource market -the real flow(goods and services) and the money flow
Command System
-Known as socialism or communism -Government ownership of resources -Decisions made by a central planning board (North Korea, Cuba, Myanmar)
Dollar Votes
-Method for consumers to determine which goods will be produced -determines which products and industries survive or fail
Laissez-Faire Capitalism
-The Ideal Economy -keep government out of economy -Power of government only needed to protect private property from theft and provide a legal environment for contract enforcement -people interact in markets to buy and sell
5 Fundamental Questions
-What goods and services will be produced? -How will the goods and services be produced? -Who will get the goods and services? -How will the system accommodate change? -How will the system promote progress?
Characteristics of the Market System
-private property -freedom of enterprise -self-interest -competition -market and prices
The Invisible Hand
-unity of private and social interest -virtues of the market system: efficiency, incentives, and freedom
Competition
A controlling mechanism in market system. With a large number of sellers and buyers means no one can control the market place.
Market System
A mix of decentralized decision making with some government control. -systems found in much of world -private markets are dominant forces -private ownership of resources -self-interest behavior
Technology and Capital Goods
Advanced technology and capital goods are encouraged. -Competition and potential of profits provide the incentive for capital accumulation(investment) -Promote efficiency and greater output.
Market
An institution that brings buyers and sellers together.
How the system deals with risk:
Business owners and investors face risk like losses due to input shortages, changes in consumer taste, natural disasters that affect the supply chain. Employees and suppliers have security because they are paid whether the firm makes a profit or not.
The demise of the command systems
Command system was a failure because of the coordination problem, it set output targets for all goods, and the incentive problem, no adjustments for surplus or shortage.
Who will get the output?
Consumers with the ability and willingness to pay will get the product. -ability to pay depends on income -income depends on ownership of resources and the prices those resources command in market
Markets and prices
Decisions by buyers and sellers determine the products and prices. Those who respond to the market signals will be rewarded with profits and incomes.
Self Interest
Driving forces in market system. The businesses maximize profits or minimize losses. Resources suppliers maximize income. Consumers maximize satisfaction.
Role of Government
Government may be needed to alleviate market failure like wrong mix of output, macro instability, and too much pollution. Government can increase effectiveness of market system. -possible government failure
How would an owner prosper?
If they manage risk well.
How will the goods be produced?
Minimize the cost per unit by using the most efficient techniques -technology -prices of the necessary resources
Use of Money
Money makes trade easier, it is the medium of exchange. Without money, people would have to barter.
Economic System
Set of institutional arrangements and coordinating mechanisms to solve economic problems.
Geographical Specialization
Take advantage of localized resources and international trade.
How will the system progress?
Technological advance -creative destruction Capital accumulation
What does the system focus attention on?
That the owner is personally responsible for outcome and will encourage prudent decisions.
Consumer sovereignty
The pursuit of self-interest.
Profit
Total revenue - cost
Signals
directions for a successful business.
