Chapter 2 Flashcards
(24 cards)
Economic system
Set of institutional arrangements and a coordinating mechanism for solving the economising problem
Market system
Fully private ownership of all FOP
Gov. Partial role sets the rules for economic activity & promotes economic stability & growth
Market system - capatilism
Private property
Freedom of enterprise and choice
Self-interest
Competition
Markets and prices
Market system characteristics
- Specialisation
- Division of labour
- Competition
- Private property
- Freedom of enterprise and choice
- Technology and capital goods
Laissez-Faire Capitalism
“pure capitalism”
Gov. role is limited to protecting private property and establishing a legal environment in which contracts are enforced and people interact in markets to buy & sell
Freedom of enterprise
Firms can get and use economic resources to produce what they want and sell in the markets they want to
Freedom of choice
Enables owners to employ/ dispose their property and money as they want to
Command system
Socialism/ communism
FOP are centrally owned by Gov. And cental planning board makes decisions
Lacked entrepreneurship
Socialism
Social ownership of FOP not private; community as a whole
Communism
All property is owned by the community and each person contributes and receives according to their ability and needs
The coordination problem
Outputs of some industries were inputs to others, failure of one lead to more
The incentive problem
Many products were either in short supply or overproduced
The ‘invisible hand’
Adam Smith wrote Wealth of Nations
1776
The tendency of firms & resource suppliers that seek to further their own self-interests to also promote the interest of society
- Efficiency
- Incentives
- Freedom
Emerging markets
Combination of market system form yet still depending highly on Gov. Intervention in terms of infrastructure development
Emerging markets characteristics
- Volatile domestic markets
- Dependent on wellness of global markets
- Potential investment opportunities
- Moving away from dependence on primary production
What will be produced?
G & S produced at a continuing profit will be produced (TR - TC= PROFIT/LOSS)
Consumer sovereignty and Rand votes
How will G & S be produced?
In combinations and ways that minimise the cost per unit of output
Most efficient technique depends on:
Availability of technology & prices of resources
Who will get the output?
Depends on consumers income, prices of and preferences for goods
How will the system accommodate the changes
Producers will know thru changes in spending on goods by consumers
How will the system promote progress
Technological advancement: new and improved methods that reduce production/ distribution costs
= creative destruction
Capital accumulation: entr. And owners of firms use part of their income to purchase capital goods
The ‘invisible hand’
Efficiency
The efficient use of resources into the production of G & S most wanted by society
The ‘invisible hand’
Incentives
Market system encourages skill acquisition, hard work and innovation = higher production, income, standard of living
The ‘invisible hand’
Freedom
Personal feedom; freedom of enterprise and choice
Specialisation
Concentrating production on 1 or a small number of goods and services
