Chapter 2

The Market System

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Economic Systems
Economic systems
Set of ins,tu,onalized arrangements
Coordina,ng mechanism
Dierences in systems exist by
Degree of decentralized use of markets and
prices in decision-making
Degree of centralized government control
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Laissez-Faire Capitalism
Ideal economy
Keep the government from interfering with
the economy
Power of government just needed to
Protect private property from theK
Provide a legal environment for contract
enforcement
People interact in markets to buy and sell
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The Command System

The command system is known as socialism
or communism
Government ownership of resources
Decisions made by a central planning board
North Korea, Cuba, Myanmar

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The Market System

The market system is a mix of decentralized
decision making with some government
control
Systems found in much of the world
Private markets are dominant force
Private ownership of resources
Self-interested behavior

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Characteristics of the Market

System

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Private property
Freedom of enterprise
Freedom of choice
Self-interest
Compe<<on
Market and prices

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Global Perspective

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Technology and Capital Goods

Advanced technology and capital goods are
encouraged
Specializa<on
Division of labor
Geographic specializa,on

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Active, but Limited Government

Government may be needed to alleviate
market failures
Government can increase eec,veness of a
market system
Possible government failure

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The Invisible Hand

The invisible hand
1776 Wealth of Na+ons by Adam Smith
Unity of private and social interest
Virtues of the market system
Eciency
Incen,ves
Freedom
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The Demise of Command Systems

Command system was a failure
Soviet Union, Eastern Europe, and China
The coordina,on problem
Set output targets for all goods
The incen,ve problem
No adjustments for surplus or shortage

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