CHAPTER 4: THE MARKET SYSTEM

CHARACTERISTICS OF THE MARKET SYSTEM

•  Private Property – The private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and business to obtain, use and dispose of property resources as they see fit. The right to bequeath – the right of property owners to designate who will receive their property when they die – sustains the institution of private property.

• Freedom of Enterprise and Choice

·         Freedom of enterprise – ensures that entrepreneurs and private business are free to obtain and use economic resources to produce their use of goods and services and to sell them in their chosen markets.

·         Freedom of Choice – enables owners to employ or dispose of their property and money as they see fit.

•  Self- interest – is the motivating force of all the various economic units as they express their free choices.

• Competition – requires independently acting sellers and buyers operating in a particular product or resource market. It also requires freedom of sellers and buyers to enter or leave markets, on the basis of their economic self – interest.

•  Markets and Prices – They give the system its ability to coordinate millions of daily economic decisions.

•  Reliance on Technology and Capital Goods – The market system therefore encourages extensive use and rapid development of complex capital goods: tools, machinery, large-scale factories, and facilities for storage, communication, transportation and marketing. The only way to avoid inefficiency is to rely on roundabout products.

• Specialization – is extensive in market systems, it enhances efficiency and output by enabling individuals, regions and nations to produce the goods and services for which their resources are best suited.

·         Human Specialization – called division of labor – contributes to a society’s output in several ways:

-Specialization makes use of differences in ability

-Specialization fosters learning by doing

-Specialization saves time

·         Geographic Specialization – specialization also works on a regional and international basis.

•  Use of money – it facilitates the exchange of goods and services that specialization requires.

FOUR FUNDAMENTAL QUESTIONS

1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will get the goods and services?
4.  How will the system accommodate change?

COMPETITION AND THE “INVISIBLE HAND”

Invisible hand – channels the pursuit of self-interest to the good of society.

3 merit special emphasis:

• Efficiency
•   Incentives
•  Freedom