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Macroeconomics Chapter 2
The Market System and the Circular Flow - Principles of Macroeconomics
32
Economics
Undergraduate 2
02/05/2014

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Term
economic system
Definition
a particular set of institutional arrangements and a coordinating mechanism--to respond to the economizing problem
Term
command system
Definition
also known as socialism or communism - government owns most property resources and economic decision making occurs through a central economic plan
Term
market system
Definition

capitalism - characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity

 

(private property, freedom of enterprise and choice, self-interest, competition, markets and prices)

 

Australia, Switzerland, and U.K.

 

 

 

Term
private property
Definition

personal property - gives owner freedom to negotiate binding legal contracts, enables them to dispose of resources as they see fit

 

the right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other products

Term
freedom of enterprise
Definition
freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice
Term
freedom of choice
Definition
enables owners to employ or dispose of their property and money as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate
Term
competition
Definition

market system depends on competition - freedom of choice exercised in pursuit of a monetary form.

the presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market

 

requires:

  • two or more buyers or two or more sellers acting independently in a particular product or resource market
  • freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest

 

 

Term
market
Definition
an institution or mechanism that brings buyers - demanders - and sellers - suppliers - into contact
Term
specialization
Definition
using the resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services
Term
the division of labor
Definition

Human specialization


  • Makes use of differences in ability - enables individuals to take advantage of existing differences in their abilities and skills
  • Fosters learning by doing - by devoting time to a single task, the person qill improve techniques rather than doing multiple tasks
  • Saves time - by devoting time to a single task, a person avoids the time spent shifting from one task to another
Term
medium of exchange
Definition

an intermediary instrument used to facilitate sale, purchase or trade of goods between parties. In modern economies the medium of exchange is

 

CURRENCY

Term
barter
Definition
swapping goods for goods
Term
money
Definition
convenient social invention to facilitate exchanges of goods and services
Term
consumer sovereignty
Definition

CONSUMER PREFERENCES determine the production of goods and services

 

crucial in determining the types and quantities of goods produced 

 

consumers spend their income on the goods they are most willing and able to buy

Term
dollar votes
Definition

 

is used for describing how consumers and entrepreneurs effectively “vote” for products when they purchase goods, as well as which product should be selected to be produ

Term
creative destruction
Definition
the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies
Term
"invisible hand"
Definition
The tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote interests of society
Term
circular flow diagram
Definition
An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms
Term
resource market
Definition
A market in which households sell and firms buy resources or the service of resources
Term
product market
Definition
A market in which products are sold by firms and bought by households
Term
cetris paribus
Definition
all other things remaining the same
Term
Geographic specialization
Definition

industrialized countries : canada/U.S.

non-industrialized countries: afghanistan/egypt

Term
Active but limited government
Definition

government may be needed to alleviate "market failures"

 

govt can increase "effectiveness" of a market system

Term
What will be produced?
Definition
  • Goods and services that create a profit
  • "Dollar votes" 
  • Determines which products and industries "survive or fail"
Term
How will the goods be produced?
Definition
  • Minimize the cost per unit by using the most efficient techniques
  • Technology
  • Prices of the necessary resources (land, labor, capital, entrepeneurship, and technology)
Term
Capital
Definition
Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods
Term
Productivity
Definition

=

total outputs


total inputs

 

Term
Who will get the output?
Definition
  • Consumers with the ability  and  willingness to pay
  • Ability to pay depends on income
 
Disposable income (take home): C=YD 
YD = Y-T

 Y = gross income, T = taxes

Term
How will the system change?
Definition
  • Changes in consumer taste
  • Changes in technology
  • Changes in resource prices

Term
How will the system promote progress?
Definition
  • Technological advance (creative destruction)
  • capital accumulation

Ex. K2014 = K2013 + ΔKt

K2014 = Total capital accumulation in 2014

K2013 = net capital accumulation in 2013

ΔK= Change in capital accumulation

 

 

Term
Virtues of the market system
Definition
  • Efficiency: allocative (resources) efficiency
  • Incentives: the market system encourages continuous improvement in one's skill
  • Freedom: economic freedom
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