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Unformatted text preview: The Market System and the Circular Flow ANSWERS TO END-OF-CHAPTER QUESTIONS 2-1 Contrast how a market system and a command economy try to cope with economic scarcity. A m a r k e t s y s t e m a l l o w s f o r t h e p r i v a t e o w n e r s h i p of resources and coordinates economic activity through market prices. Participants act in their own self-interest and seek to maximize satisfaction or profit through their own decisions regarding consumption or production. Goods and services are produced and resources are supplied by whoever is willing to do so. The result is competition and widely dispersed economic power. T h e c o m m a n d e c o n o m y i s c h a r a c t e r i z e d b y p u b l i c ownership of nearly all property resources and economic decisions are made through central planning. The planning board, appointed by the government determines production goals for each enterprise. The division of output between capital and consumer goods is centrally decided based on the boards long-term priorities 2-2 How does self-interest help achieve societys economic goals? Why is there such a wide variety of desired goods and services in a market system? In what way are entrepreneurs and businesses at the helm of the economy but commanded by consumers? T h e m o t i v e o f s e l f- i n t e r e s t g i v e s d i r e c t i o n a n d c o n s i s t e n c y t o t h e e c o n o m y . T h e p r i m a r y d r i v i n g force of the market system is self-interest. Entrepreneurs try to maximize their profits; property owners want the highest price for their resources; workers choose the job with the best wages, fringe benefits and working conditions. Consumers apportion their expenditures to maximize their utility, while seeking the lowest possible prices. As individuals express their free choice, the economy is directed to produce the most wanted goods at the lowest possible cost. E a c h i n d i v i d u a l c o n s u m e r w i l l c h o o s e a v a r i e t y o f g o o d s a n d s e r v i c e s t h a t i n c o m b i n a t i o n w i l l maximize his/her satisfaction (utility). There is a wide variety because individual wants are diverse. To maximize profits, producers must respond to the desires of the individual consumer. A l t h o u g h p r o d u c e r s a r e f r e e t o c h o o s e w h a t p r o d u c ts they will produce, if the producers are to maximize profits, these good and services must be what consumers desire. Entrepreneurs can drive the economic ship where they want (at least for a while), but the ship will run aground (businesses will fail) if entrepreneurs at the helm dont listen to the consumers that command them. 2-3 Why are private property, and the protection of property rights, so critical to the success of the market system?...
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This note was uploaded on 06/17/2011 for the course BUS 720 taught by Professor Na during the Summer '11 term at McMaster University.
- Summer '11