My first Macroeconomics test is coming up on the 21st. I need to cover all of chapter 2 and 3 today. As well as start on the extra credit. My professor says that the class will need it. I also missed the first day of class due to jury duty, now I have to email him a scan of my juror badge and certificate of attendance.
Anyways, time for a Macroeconomics lesson. The book I will be using is called Macroeconomics by McConnell Brue and is published by McGraw-Hill.
Chapter 2 is titled The Market System and the Circular Flow.This chapter outlines the types of economic systems that exist as well as the process by which goods are produced, sold, and priced.
Warning! I live in America, so this book is more than a tad biased towards capitalism and the Market System.Also these writings are NOT directly quoted from the book I am using because I like to cut out all the useless filler.
An economic system is a particular set of institutional arrangements and a coordinating mechanism which work together to respond to the economizing problem.
An economic system has to determine what goods are produced, how they are produced, who gets them, how to accommodate change, and how to produce technological progress in society.
The first economic system introduced is the command system also known as socialism or communism. In this system the government owns most property resources and economic decisions are made using a central economic plan. The government has absolute control over all aspects of the economy in the command system.
The second economic system is called the market system also known as capitalism. In this system almost all resources are privately owned, and the use of resources is governed by market activity. People living in this system act on self-interest. In a purely capitalistic (laissez-faire) society there would be no government intervention, however, that is impractical for many reasons. Capitalism practiced in the United States and other countries tend to have a moderate amount of government regulation.
The market system is characterized by freedom of enterprise, freedom of choice, self-interest, competition, markets and prices, technology, specialization, use of money, and limited government intervention. Most of these are self explanatory.
Freedom of enterprise means that anyone can start a business and use resources if they can purchase them.
Freedom of Choice allows the owners of a business to run it however they see fit as long as it does not break the law.
Competition is the main vehicle by which the best product is obtained at the lowest possible cost. This is possible because many different vendors can enter the industry according to their self-interest. If there are many vendors, no one vendor can dictate the price of a good.
Markets and prices are set by the supply and demand in the market. If no one wants rocket powered pogo sticks, then society will not attempt to produce them. If research shows that carrots cure cancer, farmers will produce more carrot due to a change in consumer tastes.
Technology in the market system progresses because of self-interest. In the market system, successful inventors and innovators are rewarded.
Specialization is the use of resources to produce a small number of goods and services. These goods and services are then exchanged for whatever the provider wants. Most consumers in the market system consume very little of what they themselves have the ability to produce.
Division of Labor is another name for human specialization. This means that people in society provide the services that they are best at. A person who is great at English becomes a writer and not a mathematician.
All economic systems use money as a medium of exchange. Money is used to trade when there is not a coincidence of wants between two individuals. Money is also used as a store of value and as a unit of account.]
Government intervention in the market system is very limited. The government only intervenes when it needs to iron out what are called “Market Failures”. Market Failures are inherent shortcomings of the market system.
Phew I need a break.