Chapter 2: the Market System and the Circular Flow Notes
Chapter 2: The Market and the Circular Flow
The three core choices that confront every nation: * What to produce with our limited resources * How to produce goods and services we select * For whom good and services are produced (who should get them)
Economic Systems: * Set of institutional arrangements * Differ based on: * A) Who owns the factors of production? * B) What method directs economic activity?
The three economic systems:
Planned economy: * Called a command economy * Production, distribution, and prices, are all made by the government * Market forces have very little role in such an economy * This type of economy lacks the kind of flexibility that is present in a market economy, and because of this, the planned economy reacts slower to changes in consumer needs
Mixed economy: * Combines elements of both the planned and the market economies in one cohesive system * Certain features from both market and planned economic systems are taken to form this type of economy * This system prevails in many countries where neither the government nor the business entities control the economic activities of that country – both sectors play an important role in the economic decision-making of the country * Includes both capitalist and socialist economic policies
Market economy: * In a market economy, national and state governments play a minor role * Consumers and their buying decisions drive the economy * In this type of economic system, the assumption of the market plays a major role in deciding the right path for a country’s economic development * The absence of central planning is one of the major features of this economic system * Market decisions are mainly dominated by supply and demand * The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities
Market System Characteristics: *
The three core choices that confront every nation: * What to produce with our limited resources * How to produce goods and services we select * For whom good and services are produced (who should get them)
Economic Systems: * Set of institutional arrangements * Differ based on: * A) Who owns the factors of production? * B) What method directs economic activity?
The three economic systems:
Planned economy: * Called a command economy * Production, distribution, and prices, are all made by the government * Market forces have very little role in such an economy * This type of economy lacks the kind of flexibility that is present in a market economy, and because of this, the planned economy reacts slower to changes in consumer needs
Mixed economy: * Combines elements of both the planned and the market economies in one cohesive system * Certain features from both market and planned economic systems are taken to form this type of economy * This system prevails in many countries where neither the government nor the business entities control the economic activities of that country – both sectors play an important role in the economic decision-making of the country * Includes both capitalist and socialist economic policies
Market economy: * In a market economy, national and state governments play a minor role * Consumers and their buying decisions drive the economy * In this type of economic system, the assumption of the market plays a major role in deciding the right path for a country’s economic development * The absence of central planning is one of the major features of this economic system * Market decisions are mainly dominated by supply and demand * The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities
Market System Characteristics: *