Week 2- Market System and the Circular Flow notes Flashcards Preview

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Flashcards in Week 2- Market System and the Circular Flow notes Deck (17):

Command system (social/communism)

Gov't own property, make decision through central economic plan.


Market system (capitalism)
1. Private ownership.

More technologies from competition, freedom of choice, self-interest and rewards.

1. Private ownership: individuals and firm own land and capital.
Freedom to negotiate contract
Property gives incentive to achieve more.


Freedom of enterprise-

Free to obtain resources and sell goods.


Freedom of choice-

We can employ, dispose our property do to whatever we want.



Resources allocation makes us happy and satisfy.



More than 2 buyers and sellers that act independently.
Free market- free to enter/leave.
Competition diffuses monopoly.


Market and prices-

Main factor that makes market works.



Use of resources to specialized in producing specific goods.


Division of labor-

Specialization of labor does 3 things:
Make use of different ability from workers.
Learn from doing.
Save time and cost.


Geographic specialization-

Some land of specific resources such as coal and oil.


Use of money-

Money use as exchange. Helps trade and exchange.


5 basic Qs:
1. What will be produced?
2. How goods be produced?
3. Who get the output?
4. How the system provide change?
5. How the system promote progress?

1. We make goods that earn more profit than other goods.
2. Whichever tech that be the cheapest to produce.
3. People ability and willingness to pay.
4. Firms will change production process to keep the production cost low.
5. Economic growth by using technology. More technological progress means higher standard of living.


Creative destruction-

Creation of new products will destroy market's unwillingness to change.
Ex: DVD created to replace tapes. Tape industry will gone.


Invisible hand-

Proposed by Adam Smith. Gov't should leave market alone to act by itself.


3 virtues of market system:
1. Efficiency-
2. Incentives-
3. Freedom-

1. Sellers producing goods that society wants. Where competition btwn sellers creating the most cost effective product.
2. Market encourage hard work, innovation to make profits.
3. Market let sellers and buyers to communicate btwn themselves to allocate resources.


Command system:
Coordination problem-

Few central planner had to coordinate millions of individual decisions and allocate resources around. You ain't God.


Command system:
Incentive problem-

Central planner choose the output, there's shortage and surplus entering market. No private ownership means lack of incentive to make.