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chapter 2 econ

by: Ashley Albers

chapter 2 econ Economics 1051

Ashley Albers
GPA 3.3
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second chapter
General Economics
George Chikhladze,Martha Steffens
Class Notes
Econ, mizzou




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This 5 page Class Notes was uploaded by Ashley Albers on Friday January 29, 2016. The Class Notes belongs to Economics 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Spring 2016. Since its upload, it has received 16 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.


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Date Created: 01/29/16
Chapter 2: Economic Systems  Set of institutional arrangements  Coordinating mechanism  Differences in systems exist by: o Who owns the factors of production  Anything used to produce: Human Capital, entrepreneurship (managerial talent to put together), work and land o What method is used to motivate, coordinate and direct economic activity The command system o Known as socialism or communism o Government ownership (all factors of production are owned by government) o Decisions made by a central planning board (i.e. all decisions including colors of car, sizes of t-shirts, how many doctors, etc.) o North Korea and Cuba are last remaining examples of largely centrally planned economies  Cuba is changing around and China although is communist a lot of things aren’t centrally planned o Global snapshot  The two Koreas: North GDP $40 Billion, Exports $2 billion, imports $3.5 billion; South GDP $ 1.3 trillion, exports $355 billion, imports $313 billion  North Korea is an agricultural economy and is poorer than south Korea The Market System o Opposite of command economy and is also known as capitalism o Private ownership of resources (factors of production owned by private individuals) o Decisions based and concentrated on markets instead of government planning, decisions are decentralized to the individual consumers o Characteristics:  Private property (key to successful economy)  Freedom of enterprise and choice Workers to find jobs they are best suited for  Self interest All decisions relating to consumers, profit, utilities i.e. Uber vs. cab company  Competition Them pursuing profit, pleasing consumer is the only way to survive competition  Markets and prices Goods and services and everything we use is produced on the market, prices serve as signaling device Willing to pay higher price for quality, higher price = higher profit (increase production for more sales) o Free markets: Hong Kong, Australia, Switzerland o Mostly free markets: United States, Japan, Czech Republic o Mostly un-free: Nigeria, Vietnam, Russia o Repressed: Iran, Burma, North Korea o Specialization  Common in all market economies  Division of labor: each of us has a specific skill set and we perform only that Differences in our ability (some more athletic, some more studious) Learning by doing (the more you do a task the better you get at it) Time saving (save time by not switching between different tasks) o i.e. Henry Ford, assembly line resulting in huge increase of productivity  Geographic specialization  Different regions to take advantage of natural resources  Trade (Nebraska corn, Florida oranges) o Use of Money  Makes trade easier  Alternative, barter trade is inefficient  Barter requires double coincidence of wants (if someone wants oranges and you have them then you could trade but if you don’t have something they want then you would just use money)  If everyone uses money you just pay for it instead of worrying about barter o Active but limited Government  Government may be needed to alleviate market failures  Unemployment: unemployment insurance from the government if you lose your job (80% former wages)  Government intervention with firms who have too much market power (i.e. standard oil – Rockefeller owned so much and so many parts government broke them up)  Government can increase effectiveness of a market system o The four fundamental questions (how market system economies answer these questions)  What goods and services should be produced?  Goods and services that create a profit  “Dollar votes” o What gets produced is decided by how much consumers are willing to pay o Determines which products will survive or fail  How will the goods and services be produced?  Machines or workers? Who gets to decide? Or what resources?  Minimize the cost per unit by using the most efficient techniques o Technology o Prices of the necessary resources  Who will get the goods and services?  Economic output distributed. Who determines how much we should get?  Consumers with the ability and willingness to pay will get the product o Ability to pay depends on income  How will the system promote progress?  Technological advance (silicone valley) o Creative destruction: some business go out of business while new ones succeed (some jobs lost and businesses lost but that’s what the consumers decided)  Capital accumulation o Financial system that channels funds  Where do they get the huge sums of money for startup companies – millions of investors  Without financial assistance the startup companies would stay startup)  The competitive market system encourages innovation and technological advance primarily through profitable returns to innovative firms o Businesses  Three main categories of businesses:  Sole proprietorship o 72% of firms / 4% of sales revenue o Owned by one person or one family and that person is responsible for all the profit and the success or failure of business  Partnership o 10% firms / 14% of sales revenue o Typically more than one owner (i.e. law firms) jointly responsible for profits, debts, and success/failure  Corporation o 18% of firms / 82% of sales revenue o Millions of share holders and investors; publically owned companies (i.e. Microsoft, apple)  To become owner you just have to buy a stock  If Microsoft were to fail and you had stock you wouldn’t be liable / personal assets protected o World top 3 corporations: Walmart $408 billion; Royal Dutch Shell $285 billion; ExxonMobil $285 billion (gas companies probably fell lower because of low gas prices)  Difference between the three types lies with the responsibility, who holds responsibility of the business  Sole proprietorships and partnerships can become corporations by going public  Unlimited vs. limited liability o Households  Major percentage of earned income comes from wages followed by proprietors and corporate profits  Major percentage of consumer expenditures is on services, then nondurable goods, followed by durable goods *Red text are the clicker questions*


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