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Chapter02 - The Market System and the Circular Flow CHAPTER...

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The Market System and the Circular Flow 28 CHAPTER TWO THE MARKET SYSTEM AND THE CIRCULAR FLOW I. Learning objectives – In this chapter students will learn: A. The difference between a command system and a market system. B. The main characteristics of the market system. C. How the market system decides what to produce, how to produce it, and who obtains it. D. How the market system adjusts to change and promotes progress. E. The mechanics of the circular flow model. II. Economic Systems Economic systems differ in two important ways: Who owns the factors of production and the method used to coordinate economic activity . A. Command economy, socialism or communism: 1. There is public (state) ownership of resources. 2. Economic activity is coordinated by central planning B. The market system: 1. There is private ownership of resources. 2. Markets and prices coordinate and direct economic activity. 3. Each participant acts in his or her own self-interest. 4. In pure capitalism the government plays a very limited role. 5. In the U.S. version of capitalism, the government plays a substantial role. III. Characteristics of the Market System A. Private individuals and firms own most of the private property (land and capital). 1. Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, control, use, and dispose of this property. 2. Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and economic growth. 3. Property rights extend to intellectual property through patents, copyrights, and trademarks. B. Freedom of enterprise and choice exist. 1. Freedom of enterprise means that entrepreneurs and businesses have the freedom to obtain and use resources, to produce products of their choice, and to sell these products in the markets of their choice. 2. Freedom of choice means: a. Owners of property and money resources can use resources as they choose. b. Workers can choose the training, occupations, and job of their choice.
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