ECN 204 Lecture Notes - Lecture 2: Invisible Hand, Economic System, Externality

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7 Feb 2016
Week 2: Economics Market systems
Economic systems
-Economic systems dier in two important ways: Who owns the factors
of production and the method used to coordinate economic activity
- A particular set of institutional arrangements and a coordinating
mechanism for producing goods and services.
The Commend System
-Most resources are owned by the government.
-Economic decisions are made by a central government body
The Market System
1. There is private ownership of resources.
2. Markets and prices coordinate and direct economic activity.
3. Each participant acts in his or her own self- interest.
4. In pure capitalism the government plays a very limited role.
5. In the Canadian version of capitalism, the government plays a
substantial role.
Private individuals and +rms own most of the private property (land and
capital) :
-Private property, coupled with the freedom to negotiate binding legal
contracts, enables individuals and businesses to obtain, control, use,
and dispose of this property.
-Private property rights encourage investment, innovation, exchange of
assets, maintenance of property, and economic growth.
-Property rights extend to intellectual property through patents,
copyrights, and trademarks
Freedom of enterprise and choice:
-Freedom of enterprise means that entrepreneurs and businesses have
the freedom to obtain and use resources, to produce products of their
choice, and to sell these products in the markets of their choice.
Freedom of choice means:
a. Owners of property and money resources can use resources as they
b. Workers can choose the training, occupations, and job of their choice.
c. Consumers are free to spend their income in such a way as to best
satisfy their wants.
-Entrepreneurs try to maximize pro+t or minimize loss.
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-Property owners try to get the highest price for the sale or rent of their
-Workers try to maximize their utility (satisfaction) by +nding jobs that
oer the best combination of wages, hours, fringe bene+ts, and
working conditions.
-Consumers try to obtain the products they want at the lowest possible
price and apportion their expenditures to maximize their utility.
Competition among buyers and sellers is a controlling mechanism.
-Large numbers of sellers mean that no single producer or seller can
control the price or market supply.
-Large number of buyers means that no single consumer or employer
can control the price or market demand.
-Depending upon market conditions, producers can enter or leave
industry easily.
Markets and Prices
-A market system conveys the decisions of the many buyers and sellers
of the product and resource markets.
-A market is an institution or mechanism that brings buyers and sellers
into contact.
-Individual decisions by buyers and sellers in the market determine the
product and resource prices that, in turn, guide further decisions by
resource owners, producers, and consumers.
-Those who respond to the market signals will be rewarded with pro+ts
and income.
Technology and Capital Goods
-Competition, freedom of choice, self-interest, and the potential of
pro+ts provide the incentive for capital accumulation (investment).
-Advanced technology and capital goods promote e6ciency and greater
Specialization/Division of labour
-People can take advantage of dierences in abilities and skills.
-People with identical skills may still bene+t from specialization and
improving certain skills. (Learning by doing) Specialization saves time
involved in shifting from one task to another.
-Geographic specialization
-Regional and international specialization take advantage of localized
resources. ( a speci+c region specializes in one product and trade so
they enjoy product variety)
Use of money
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