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Principles of Macroeconomics: Chapter 2

by: Jessica Taflinger

Principles of Macroeconomics: Chapter 2 Ec 2113

Marketplace > Mississippi State University > Macro Economics > Ec 2113 > Principles of Macroeconomics Chapter 2
Jessica Taflinger

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About this Document

These notes cover Chapter 2 of principles of macroeconomics
principles of macroeconomics
Dr. Heriberto Gonzalez
Class Notes
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This 4 page Class Notes was uploaded by Jessica Taflinger on Sunday September 4, 2016. The Class Notes belongs to Ec 2113 at Mississippi State University taught by Dr. Heriberto Gonzalez in Fall 2016. Since its upload, it has received 9 views. For similar materials see principles of macroeconomics in Macro Economics at Mississippi State University.


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Date Created: 09/04/16
Chapter 2: The Market System and the circular Flow ● Economic Systems ○ Set of institutionalized arrangements  ○ Coordinating mechanism ● Differences in systems exist by  ○ Degree of decentralized use of markets and prices in  decision­making ○ Degree of centralized government control ● Ideal economy [“ keep the government from interfering with the economy”] Laissez­Faire Capitalism ● Power of government just needed to  ○ Protect private property from theft ○ Provide a legal environment for contract enforcement ● People interact in markets to buy and sell ● The Command System ○ Known as socialism or communism ○ Government ownership of resources ○ Decisions made by a central planning board ○ North Korea, Cuba, Myanmar ● Market System ○ A mix of decentralized decision making with some  government control ○ Systems found in much of the world ● Characteristics of the Market System ○ Private property ○ Freedom of enterprise ○ Freedom of choice ○ Self­ interest  ○ Competition ○ Market and prices ● Technology and Capital goods           [ Market system reward individuals and business] ● Advanced technology and capital goods are encouraged ● Specialization ○ Division of labor ○ Geographic Specialization ● Active, but limited government ○ Government may be needed to alleviate market failures ■ Externalities ○ Government can increase effectiveness of a market system ■ Social needs vs. Private needs ○ Possible government failure ■ Too much regulation ● What will be produced? ○ Goods and service that create a profit ○ Consumer soverighty ○ “Dollar Votes” ■ Method for consumers to determine which  goods will be produced ■ Determines which products and industries  survive ● How will the goods be produced? ○ Minimize the cost per unit by using the most efficient  techniques ■ Technology ■ Prices of the necessary resources ● Who will get the output? ○ Consumers with the ability and willingness to pay will get the product ○ Ability to pay depends on income ● How will the system change? ○ Changes in consumer tastes ○ Changes in technology ○ Changes in resource prices ● How will the system progress? ○ Technological advance ■ Creative destruction ( increase productivity  substitution of obsolete tech) ○ Capital accumulation   ● The “invisible hand” ○ 1776 Wealth of Nations by Adam Smith ■ Unity of private and social interest ○ Virtues of the market system ■ Efficiency ■ Incentives ■ Freedom ● The Demise of command system ○ Command system was a failure ○ Soviet union, eastern europe, and china ○ The coordination problem ■ Set output targets for all goods ○ The incentive problem ■ No adjustments for surplus or shortage ● The circular flow market ○ The circular flow diagram ○ Households ○ Businesses ■ Sole ● How the system deals with risk ○  Business owners and investors face risk ■ Losses due to input shortages ■ Changes in consumer tastes ■ Natural disasters that affect the supply chain ○ Employees and suppliers have security ■ Paid whether the firm make a profit or not


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