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Chapter 2 Handout

Principles of Microeconomics + DiscoverEcon code card

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Chapter 2 The Market System Economic systems differ in two important ways: Who owns the factors of production and the method used to coordinate economic activity. A. The market system – our 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. B. Command economy, socialism or communism – China, Cuba, North Korea 1. There is public (state) ownership of resources. 2. Economic activity is coordinated by central planning. I. Characteristics of the Market System A. Private individuals and firms own most of the private property (land and capital). 1. Private property - 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 that a. Owners of property and money resources can use resources as they choose. b. Workers can choose the training, occupations, and jobs they wish. c. Consumers are free to spend their income in such a way as to best satisfy their wants (consumer sovereignty). C. Self-interest a. Self-interest is one of the driving forces in a market system . Entrepreneurs try to maximize profits or minimize losses ; resource suppliers try to maximize income; consumers try to maximize satisfaction. b. As each tries to maximize profits, income, or satisfaction, the economy will benefit if competition is present. D.
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Chapter 2 Handout - Chapter 2 The Market System Economic...

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