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Lecture 4

ECN 104 Lecture Notes - Lecture 4: Market System, Capital Accumulation, Creative Destruction


Department
Economics
Course Code
ECN 104
Professor
Teresa Fung
Lecture
4

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ECN WEEK 4 NOTES
Market system and circular flows demand, supply and market equilibrium
RECAP OF MARKET SYSTEM
- PRIVTE PROPERTY
- FREEDOM OF ENTERPRISE
- COMPETETION
- Prices as a resource allocation mechanism
- Profits to drive innovation and progress
- Money is a medium of exchange
- Limited government
MARKET FAILERS
5 FUNDAMENTAL QUESTIONS
1) What will be produced?
- Ca’t produce eerythig to fulfil all the cosuer ats
- Produce what is most profitable
- Profit = total revenue total cost
- What consumers want for with their dollar
2) How will the goods and services be produced?
- Use most efficient method to produce good/service, least costly methods
- When deciding on people V. machine, use what is most cheap
3) Who will get the goods and services?
- Those with the greatest willingness and ability to pay
4) How will the system accommodate change?
- By responding to price and profit signals
- Example: consumers want more juice and less milk juice price will rise where
milk price will fall
5) How will the system promote progress?
- Technological advance creative destruction: the creating of new destroys the
old. Also known as Sunset industry and sun rise industry
- Capital accumulation different generations of capital goods- always
accumulating new goods on top of the old. Most new tech. require additional
capital goods
-
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THE INVISIBLE HAND
- Prices communicate information about scarcity and value
- Compettion forces produceers and resources suppliers to respond
- Firms acting in their own best interst also promote societys interests in terms of
efficiency
- In highly competitive market system, compettion controls or guides sel invtrest
3 MARERITS OF THE MARKET SYSTEM
- Efficiency promotes the efficient use of resources
- Incentives encourage skill acquisition
- Freedom emphasis on personal freedo, freedom of enterprise and choice
THE DEMISE OF THE COMMAND SYSTEM
- The coordination problem- the outputs of many industries serve as inputs to
other industries. failure of any single industry to achieve its output TARGET
cause a chain reaction of repercussions. the result is bottlenecks and stoppages
become the norm not the expection - the major success indicatior is a
quantitative target that central planner assigned production costs, quality and
product mix are secondary considerations. Not much incentive to innovate and
change products for the better
- The incentive problem if central planner is misjudged persistent shortages and
surpluses no fluctuations in prices and profitability to signal more or less of
certain products was desired no incentives to adjust production in response to
the shortages/surplus no reward for innovation, lack of entrepreneurship
ANATOMY OF ECONOMY
CIRCULAR FLOW
- Households consumers owns most resources, factors of production, inputs,
(labor)
- Firms producers firms are responsible for factor income
- Each flow against each other but are considered equal. If you work 1 hour (labor
resource), you receive 14$
- Also, firms provide goods and service, in return get expenditure ($). Again equal
in value, but opposite in direction. Think one hand gives the other takes
- Households spend expenature on good/services. Factor markets provide wages
to households and firms. Firms delever goods/services to markets. Governments
in the middle giving services (gas, ect) to households and firms and receive taxes.
Government provides rules and regulatios to arkets ad receie….
MARKET
- an institutional or mechanism that brings together buyers (demand) and sellers
(supply)of goods/services.
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