Bài giảng MicroEconomics - Chapter 02 The Market System and the Circular Flow

The Market System and the Circular FlowChapter 2McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesEconomic systemsMarket system characteristicsMarket system questionswhat, how, and whoChange and progress in the market system The circular flow model2-2Economic SystemsSet of institutional arrangementsCoordinating mechanismDiffer based on:Who owns the factors of productionWhat method directs economic activity2-3Economic SystemsThe market systemPrivate ownershipMarketsThe command systemGovernment ownershipCentral planning board2-4Index of Economic FreedomFreeMostlyFreeMostlyUnfreeRepressed1- Hong Kong3- Ireland5- United States20- Belgium31- Spain48- France101- Brazil126- China134- Russia148- Venezuela156- Cuba157- North KoreaRanking of 157 countries for 20082-5Market System CharacteristicsPrivate propertyFreedom of enterprise and choiceSelf-interestCompetitionMarkets and prices2-6Market System CharacteristicsTechnology and capital goodsSpecializationDivision of laborGeographic specializationUse of moneyActive, limited government2-7Market System QuestionsWhat will be produced?consumer sovereigntydollar votesHow will goods be produced?technologyresource cost2-8Market System QuestionsWho gets the output?willingness to payHow is change accommodated?self-interestHow is progress promoted?technological advancecapital accumulation2-9The Invisible Hand1776 Wealth of Nations by Adam SmithUnity of private and social interestVirtues of the market systemEfficiencyIncentivesFreedom2-10The Command SystemSoviet Union, Eastern Europe, ChinaSystem was a failureThe coordination problemSet output targets for all goodsThe incentive problemNo adjustments for shortage or surplus2-11Circular FlowResourceMarketProductMarketBusinessesHouseholds2-12CostsMoney IncomeRevenueConsumptionCircular FlowResourceMarketProductMarketGoods & ServicesGoods & ServicesBusinessesInput FactorsResourcesHouseholds2-13Circular FlowResourceMarketProductMarketBusinessesHouseholdsCostsMoney IncomeInput FactorsResourcesGoods & ServicesRevenueGoods & ServicesConsumptionBoth Flows Are EqualFigure 2.2; page 402-14Key Terms economic systemcommand systemmarket systemprivate propertyfreedom of enterprisefreedom of choiceself-interestcompetitionmarketspecializationdivision of labormedium of exchangebartermoneyconsumer sovereigntydollar votescreative destruction“invisible hand”circular flow diagramresource marketproduct market2-15Next Chapter PreviewDemand, Supply, and the Market Equilibrium2-16