Macroeconomics
Chapter 4
The Market System
CHARACTERISTICS OF THE
MARKET SYSTEM
Private Property

Individuals right own most property
resources, not the government
Freedom of Enterprise

Ensures that businesses are free to obtain
economic resources to produce their choice
of goods and services to sell on the market
Freedom of Choice



Enables owners to employ or dispose their
property and money as they see fit
Allows workers to enter any line of work
Consumers are free to buy what they wish
Self-Interest

Motivation force to do what is best for themselves
Competition

“ The diffusion of economic power inherent in competition
limits the potential abuse of that power.”
Requires:
◦ Independently acting sellers and buyers
◦ Freedom of sellers and buyers to enter or leave markets
Markets and Prices

Determines prices
of resources and
products
Reliance on Technology

Market system encourages use and development of
capital goods for the sake of profits and competition
◦ Roundabout production describes the ability of tools to
produce goods in an easier way than without
Specialization

Workers ability to receive a greater benefit from
employment
◦ Jack-of-all trades are inefficient
Division of Labor 1/3

Specialization makes use of ability
◦ Takes advantage of skill sets
Division of Labor 2/3

Specialization fosters learning by doing
◦ Repetition of a single task will increase that skill
Division of Labor 3/3

Specialization
saves time
◦ Shifting from one
job to another
wastes time
Geographic Specialization

Producing products in lands most suited for
production needs
◦ Example: Growing oranges in FL instead of PA
Use of Money

Major characteristic of a market system is the
use of currency
Active, but Limited, Government

Essential to protect
consumers from
corrupt business
practices
THE MARKET
SYSTEM AT WORK
Four Fundamental Questions of the
Market System 1/4

What goods and services will be produced?
◦ Economic profit = total revenue(TR) – total cost(TC)
Four Fundamental Questions of the
Market System 2/4

How will the goods and services be produced?
Four Fundamental Questions of the
Market System 3/4

Who will get the goods and services
Four Fundamental Questions of the
Market System 4/4

How will the system accommodate change?
◦ Guiding function of prices
 Example: More demand for juice may raise price of fruit
Economic Costs and Profits

Payments must be made to secure needed
amounts of resources (Economic Costs)
Economic Costs and Profits
Payment that
covers land, labor,
and capital (Normal
Profit)
 Pure profit, all costs
covered (Economic
profit)

Profits and Losses

Expanding industry
◦ Faster growth + labor floods market = slower growth

Declining industry
◦ Slower growth and limited labor or product
Consumer Sovereignty

Consumer demand determines types of products
◦ Purchase resources and goods (Dollar Votes)
Market Restraints on Freedom

Derived Demand: The demand for resources
are derived from the products they produce
COMPETITION AND THE
“INVISIBLE HAND”
Three Virtues of the Markey System
1/3

Efficiency
◦ Adoption most effective practices
Three Virtues of the Markey System 2/3

Incentives
◦ High skill levels rewarded with higher income
◦ Encourage labor to achieve innovation
Three Virtues of the Market System
3/3

Freedom!!!
◦ of choice
◦ of enterprise