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The Modern Market Economy
Transcript of The Modern Market Economy
Simple Circular Flow
Improving Market Performance
Providing Public Goods
Providing Economic Security, Equity, and Sustainability
In modern market economies, government participation can support market exchanges and improve economic performance.
Before there was adequate government law enforcement to prevent it, people would get away with "selling" the Brooklyn Bridge, even though they didn't own it.
Buying Goods and Services in Product Markets
To provide public goods and enforce laws and regulations, governments do their own shopping for products made by private firms
Ex. The U.S. government at various levels goes to the product markets to buy firetrucks, police cars, and fuel for these vehicles; computers, furniture, and supplies for public schools; and airplanes, uniforms, and food for the military.
Producing Goods and Services
In addition to buying products, governments produce goods and services for use by households and firms
Ex, to produce the service of national defense, the U.S. government buys and rents land for military bases and hires the labor of soldiers
The government buys resources in the factor markets, and makes factor payments that end up as income for the households that supplied the resources
Government's Role in a Market Economy
The government can contribute to a market economy in several ways:
establish and enforce rules that improve market performance
provide important goods and services that private individuals tend not to purchase
help improve economic security, equity, and sustainability
Households, Firms, and Markets
Two most important categories of decision makers are households and firms
Households - an individual or a group of people who live together and share income, such as you and your family
Firm - generally referred to as a business; a privately owned organization that produces goods or services and sells them to others
Government in the Circular Flow
In the process of enforcing rules, providing public goods, and working toward the goals of society, the government takes in money, products, and resources; thus making the government a key player in modern market economies.
As households buy goods and services from firms, and firms buy or rent resources from households, a circular give and take relationship is formed.
The Circular Flow Diagram - illustrates the interactions between key players in the economy
Collecting Taxes and Making Transfer Payments
To fund their activities, government collect taxes from households and firms
Some tax revenue is spent in product markets on things like firetrucks, some is spent in factor markets on things like military personnel, and the rest is spent on transfer payments to households and businesses
Transfer Payments - expenditures for which the government receives no good, service, or resource in return.
The majority of transfer payments are made as part of the social safety net to support disadvantaged individuals
Governments use these transfer payments to improve equity and economic security
Decisions are made withing each country about the size and intention of government involvement.
Different priorities create different choices about resources use.