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Chapter 2

Chapter 2

Course Code
ECN 104
Halis Yildiz

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Chapter 2: The Market System and the Circular Flow
2.1 Economic Systems
Economic system: a particular set of institutional arrangements and a coordinating mechanism – to
respond to economic problems
Determines what & how goods are produced, who gets them and how to accommodate change
& promote technological process
Differs who own factors of production and methods used to motivate, coordinate, direct
economic activity
Command system: an economic system in which most property resources are owned by government &
economic decisions are made by a central government body (socialism/communism)
Market system: an economic system in which property resources are privately owned and markets &
prices are used to direct and coordinate economic activities (capitalism)
2.2 Characteristics of the Market System
Private property: private individuals & firms (not government) own most of the property resources
(land & capital); name of capitalism
Freedom of enterprise: freedom of firms to obtain & use economic resources to produce choice of goods
& services to sell in chosen markets
Freedom of choice:
Owners can use/sell property as they choose
Workers can work where they like
Consumers can buy what they want
Self-interest is the motivating force:
Businesses seek to maximize profits/minimize losses
Property owners try to get highest price for the sale/rent of their resources
Consumers seek to maximize their utility at the lowest possible expense
Independently acting sellers & buyers operating in a particular product/factor market
Freedom of entry & exit on the basis of their economic self-interest
Markets & Prices:
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