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Lecture 2

ECN 104 Lecture 2: ECN 104 Chapter 2

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Ryerson University
ECN 104
Tom Barbiero

Chp 2: The Market System and the Circular Flow Economic System - Economic system: a particular set of institutional arrangements and a coordinating mechanism -to respond to economic problem -determines what goods are produced, how they are produced, who gets them, how to accommodate change, and how to promote technological progress -diff as to 1) who own the factors of production and 2)the method used to motivate, coordinate, and direct economic activity 2 types of economic systems: 1) The Command System- most property resources are owned by the gov’t and economic decision are made by a central gov’t body - Aka socialism/communism - Gov’t owns most of the business firms, which produce according to gov’t directives 2) The Market System- property resources are privately owned and markets and prices are used to direct and coordinate economic activities -aka capitalism -participants act in their own self-interest Allows for the private ownership of capital, communicates through prices, and coordinate economic activity through markets- places where buyers and seller come together -competition among independently acting buyers and sellers -economic decision making is widely dispersed -high potential for monetary rewards creates powerful incentives for existing firms to innovate -in pure capitalism (laissez-faire capitalism) gov’t role is limited to protecting private property and establishing an environment appropriate to the operation of the market system -but gov’t provides rules for economic activity and promote economic stability and growth, provide certain goods and services that would otherwise be under produced or not produced at all Characteristics of the Market System Private Property- the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property - Private individuals and firm own most of the property resources ( land and capital) - The right of private property, coupled with the freedom to negotiate binding legal contract, enables individuals and businesses to obtain, use, and dispose of property resources as they see fit - Encourage investment, innovation, exchange, maintenance of property, and economic growth Freedom of Enterprise and Choice Freedom of enterprise: the freedom of firms to obtain economic resources, to use these resources to produce products of the firm’s own choosing, and to sell their products in markets of their choice Freedom of choice- the freedom of owners of property resources to employ or dispose of them as they see fit, and of consumers to spend their incomes in a manner that they think is appropriate • owners can use or sell property as they choose • workers can work where they like • consumers can buy what they want Self Interest: that which each firm, property owner, worker, and consumer believes is best for itself - firms seek profit - consumers seek value - a motivating force to express their free choices Competition- the presence in a market of a large # of independent buyers an
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