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Economics Unit 2
Transcript of Economics Unit 2
The Market System & The Circular Flow
a. Who owns production
b. The method used to motivate, coordinate, and direct Economic activity.
Centralized Economic Decisions
Centralized production ownership
Centralized decision making
Distribution of Wealth?
* Private ownership of Resources
*Free market is preserved
* Individuals seek to reach their own goals through decisions
C1: Private Property
C3: Freedom of Choice
C2: Freedom of Enterprise
All Property and Resources are owned
by Centralized Entity (Gov)
Based on long-term goals of central entity
Where does Command
Economy fall short?
MONETARY INCENTIVES MOTIVATE
INDIVIDUALS DECIDE: PURCHASE? PRODUCTION?
Preserve Private Property
Maintain Market Environment
FREEDOM TO NEGOTIATE LEGALLY BINDING AGREEMENTS
OBTAIN AND DISPOSE OF PROPERTY AT WILL
MUTUALLY AGREEABLE TRANSACTIONS
ENCOURAGES INNOVATION, MAINTENANCE, GROWTH....."It belongs to me"
INTELLECTUAL PROPERTY? PRESERVED!
FOE: Ensures Entrepreneurs & Companies
a. Produce what they want
b. Obtain resources they desire
FOC: ENSURE THAT INDIVIDUALS:
A) EMPLOY OR DISPOSE OF PROPERTY AS THEY DESIRE
B) GO INTO OCCUPATION OF THEIR CHOICE
C) PURCHASE WHAT THEY DESIRE
SELF-INTEREST MOTIVATES THE ACTIONS OF INDIVIDUALS, COMPANIES
& ORGANIZATIONS BASED ON THEIR PRIORITIES = ORGANIZED/PREDICTABLE
& LEAVE MARKET
THIS REGULATES THE MARKET AND ENSURES
NO ONE GETS TOO MUCH POWER
HIGHER PRICE? FEWER SALES
MARKET ECONOMY IS
MARKETS COLLECT EVIDENCE OF ALL OF THE DECISIONS OF
BUYERS AND SELLERS
CHOICES IN MARKET?
SELLERS: WHAT AND HOW MUCH TO SUPPLY
BUYERS: WHAT AND HOW MUCH THEY DEMAND
THIS RELATIONSHIP? SET'S PRICES
MARKET RECORDS, SUMMARIZES,
& BALANCES ALL DECISIONS NATURALLY
PAY ATTENTION? REWARDED
*HIGHLY MOTIVATED TO PAY ATTENTION
Technology & Capital Goods
Tech, Specialization, Money, and Gvt. Role
SPECIALIZATION IN M.E.
What motivates Technological Advancement?
Freedom of Choice
Who gets monetary rewards?
ENCOURAGES ENCOURAGES EXTENSIVE USE & RAPID DEVELOPMENT OF CAPITAL GOODS
LIKE...tools, machines, large-scale factories, storage, communication, marketing
Resources of individual, firm, region or nation to produce one or a few goods.
Do you consume what you produce?
Specialization increases output
DIVISION OF LABOR
1. It takes advantage of differing abilities
2. It develops more skilled labor
3. It saves time
What does your location enable you to produce @ lowest cost?
What are your resources best suited to produce?
Barter makes it difficult and has no standard
Currency is the "medium of exchange" that EASES trade
No "coincidence of wants"? With $$ that is NO PROBLEM!
What will be produced?
How do Market Economies respond to each of these questions?
HOW WILL THE SYSTEM ACCOMMODATE CHANGE?
HOW WILL SYSTEM PROMOTE PROGRESS?
HOW WILL GOODS AND SERVICES BE PRODUCED?
WHO WILL GET THE OUTPUT?
LEAST COST PRODUCTION?
MOST EFFICIENT/LEAST COSTLY
WILLING & ABLE
WILLING = DESIRE
ABLE = INCOME
PRODUCTION CHANGES IN RESPONSE TO PRICE
HIGHER PRICE? HIGHER PROFIT = HIGHER INVESTMENT
TRANSFER OF RESOURCES TO EXPANDING INDUSTRY
The "Invisible Hand"
Problems & Circular
Pure Command Economy Issues
Circular Flow Diagram
as though guided by invisible hand
Day(s) without Specialization
Econ in the NEWS!
How do we stop crime....with economics?