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The Market System
Chapter 4
Market systems characteristics
Private individuals own most land and firms
The feature cannot be overstated as private
property rights allows for the negotiation of
contracts as well as freedom to use the land for
capitalist ventures. It also encourages innovation
& growth.
This also extends to intellectual property rights
through patents, copyrights, and trademarks
Freedom of Choice
Extends far beyond owing your own land.
Freedom to produce, freedom to educate,
freedom to utilize available resources, freedom
to sell in whatever markets are available.
Applies to both employee & employer
Consumers are free to choose how dollars are
Self–Interest (Greed)
Self-Interest drives the markets. We try to
maximize profit and minimize loss. We attempt
to utilize resources while at the same time
hoping not to waste them.
The economy grows as more try to reach the
level satisfaction necessary for a thriving market.
The “controlling mechanism” of the markets
Large number of sellers means that no single
firm can control the price of a particular
Large numbers of buyers means that no single
consumer can control price or market demand
Easy entry into and out of markets is
Markets & Prices
Illustrates the decisions of buyers and sellers in
a factor and product market
Change in price = change in market
Responding to market signals translates to
success or failure depending on timing
Reliance on Technology
Competition, Freedom of choice, Profit all
provide the incentive for accumulation of capital
equipment (investment)
Roundabout method of technology – the use of
capital goods to satisfy wants indirectly
Division of Labor allows workers to specialize
in specific tasks.
Geographic Specialization takes advantage of
local resources
Money as a Medium of Exchange
Allows for multiple transactions and solves the
issues that would be associated with a barter
Uniformly accepted by all businesses as well as
all nations in some form or fashion
Exchange Markets provide way for all countries
to interact monetarily
Active, but limited government
Market shortcomings must be regulated
The U.S. Government regulates trade, promotes
competition, and assists in providing consumers
with safe and fair alternatives
4 Basic Economic Questions
What to Produce?
How to Produce?
For whom to Produce?
How to accommodate Change?
Accounting Profits = Total Revenue – Total
Accounting Costs
Normal Profits = The cost of doing business,
the break-even point
Economic or Pure Profit = Everything over and
above normal profits
Consumer Sovereignty
Consumers dictate production through choices
or “dollar votes”
Businesses do not have freedom to produce
outside of what the market demands
Demand drives Supply, and resources are valued
based on their importance in creating products
people want – Derived Demand
Technology and innovation become goals
because they increase profits. A process known
as “creative destruction” takes place when old
technology is destroyed in favor of something
more efficient.
Adam Smith’s “Invisible Hand” – The driving
force in the economy, our own self interest, the
attempt to maximize profits