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Transcript
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 spent 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. Competition The “controlling mechanism” of the markets Large number of sellers means that no single firm can control the price of a particular product Large numbers of buyers means that no single consumer can control price or market demand Easy entry into and out of markets is fundamental 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 Specialization 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 system. 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? Profits 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 Conclusion 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