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Total surplus difference between the buyers

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Total Surplus – difference between the buyers reservation price and the sellers reservation price (reservation price is the amount one is willing to pay) Cash on the Table – instances in where both parties fail to capitalize on all mutually beneficial exchanges 4 Main Economic System Types: 1. Free market 2. Traditional 3. Command 4. Mixed market Free market Economic System – buyers and sellers operate in an unregulated environment Economy has minimal economic intervention and regulation by government Opposite of controlled market, where government controls prices and regulates how property is used In free-market economy - productive efficiency occurs when society produces items using the least-cost method Traditional Economic System – in a traditional economy (customs and culture) define how resources are procedures and exchanged and how income is distributed dictates what people do for a living and how their work is performed Resources are based on inheritance Technology is often constrained when it threatens to class with tradition Religion and cultural values dictate economic development and policy making Goods are produced for consumption and surpluses do not occur, found in South America, Asian, and African countries Command Economy (Communism) – market that is characterized by public ownership of resources and centralized economic planning Referred it as centrally planned economic system, Example: former Soviet Union Opposite of capitalism, government determines what is produced, what quantities are the price of goods and services Business firms are government owned government strictly regulates buying and selling
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Mixed Market Economic System – blends free market, traditional market, and command principles (communism). U.S. is mixed economy, government plays an active role in promoting growth and stability, supplying resources that might be under produced or not produced at all (education, defense, healthcare) Blends government control with private ownership Mix of capitalism and socialism Law of Diminishing Marginal Utility – the more of something I have the less I value it Adam Smith – called this law the “paradox of water and diamonds” Law of Diminishing Return – as output increases, an organization’s short-run marginal cost will increase In relation to capital states that labor and other input cost remain constant the more capital in use, when increased will lead to less productivity o Example: if a firm purchases one machine, it will be more productive than the second, the second will be more productive than the third, etc. Law of Demand – as the product price goes up the demand goes down, conversely, if the product price decreased the demand increases Example: Pizza on sale at Wal-Mart this week sells quickly, next week no sale, pizzas will not sell quickly Typical Demand Curve Dollar (Price Per tape) 5 e 4 d 3 c 2 b a 1 2 4 6 8 10 Quantity (millions of tapes per week)
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