Chapter 2

The  Market  System  

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2-­‐2  

Economic Systems

•  Economic  systems  •  Set  of  ins,tu,onalized  arrangements  •  Coordina,ng  mechanism  

•  Differences  in  systems  exist  by  •  Degree  of  decentralized  use  of  markets  and  prices  in  decision-­‐making  •  Degree  of  centralized  government  control  

LO1  

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Laissez-Faire Capitalism

•  Ideal  economy  •  “Keep  the  government  from  interfering  with  the  economy”  

•  Power  of  government  just  needed  to    •  Protect  private  property  from  theK  •  Provide  a  legal  environment  for  contract  enforcement  

•  People  interact  in  markets  to  buy  and  sell  

LO1  

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The Command System

•  The  command  system  is  known  as  socialism  or  communism  

•  Government  ownership  of  resources  •  Decisions  made  by  a  central  planning  board  •  North  Korea,  Cuba,  Myanmar  

LO1  

2-­‐5  

The Market System

•  The  market  system  is  a  mix  of  decentralized  decision  making  with  some  government  control  

•  Systems  found  in  much  of  the  world  •  Private  markets  are  dominant  force  •  Private  ownership  of  resources  •  Self-­‐interested  behavior  

LO1  

2-­‐6  

Characteristics of the Market System

•  Private  property  •  Freedom  of  enterprise  •  Freedom  of  choice  •  Self-­‐interest  •  Compe<<on  •  Market  and  prices  

LO2  

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Global Perspective

LO2  

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Technology and Capital Goods

•  Advanced  technology  and  capital  goods  are  encouraged  

•  Specializa<on  •  Division  of  labor  •  Geographic  specializa,on  

LO2  

2-­‐9  

Active, but Limited Government

•  Government  may  be  needed  to  alleviate  market  failures  

•  Government  can  increase  effec,veness  of  a  market  system  

•  Possible  government  failure  

LO2  

2-­‐10  

The Invisible Hand

•  The  “invisible  hand”  •  1776  Wealth  of  Na+ons  by  Adam  Smith  •  Unity  of  private  and  social  interest  

•  Virtues  of  the  market  system  •  Efficiency  •  Incen,ves  •  Freedom  

LO4  

2-­‐11  

The Demise of Command Systems

•  Command  system  was  a  failure  •  Soviet  Union,  Eastern  Europe,  and  China  •  The  coordina,on  problem  •  Set  output  targets  for  all  goods  

•  The  incen,ve  problem  •  No  adjustments  for  surplus  or  shortage  

LO4