Chapter 03 - Individual Markets: Demand and Supply
Characteristics of the Market System
Private individuals and firms own most of the private property (land and capital).
Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and
businesses to obtain, control, use, and dispose of this property.
Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and
economic growth.
Property rights extend to intellectual property through patents, copyrights, and trademarks.
Freedom of enterprise and choice exist.
Freedom of enterprise means that entrepreneurs and businesses have the freedom to obtain and use
resources, to produce products of their choice, and to sell these products in the markets of their choice.
Freedom of choice means:
Owners of property and money resources can use resources as they choose.
Workers can choose the training, occupations, and job of their choice.
Consumers are free to spend their income in such a way as to best satisfy their wants (consumer
sovereignty).
Self-interest
Self interest is one of the driving forces in a market system. Entrepreneurs try to maximize profits or minimize
losses; resource suppliers try to maximize income; consumers maximize satisfaction.
As each tries to maximize profits, income, satisfaction, the economy will benefit if competition is present.
Competition among buyers and sellers is a controlling mechanism.
Large numbers of sellers mean that no single producer or seller can control the price or market supply.
Large number of buyers means that no single consumer or employer can control the price or market demand.
Depending upon market conditions, producers can enter or leave industry easily.
Markets and prices
A market system conveys the decisions of the many buyers and sellers of the product and resource
markets.Recall the demand and supply model in Chapter 3.
A change in the market price signals that a change in the market has occurred.
Those who respond to the market signals will be rewarded with profits and income.
Reliance on technology and capital goods
Competition, freedom of choice, self-interest, and the potential of profits provide the incentive for capital
accumulation (investment).
Advanced technology and capital goods uses the more efficient roundabout method of technology.
Specialization
Division of labor allows workers to specialize.
People can take advantage of differences in abilities and skills.
People with identical skills may still benefit from specialization and improving certain skills
Specialization saves time involved in shifting from one task to another.
Geographic specialization: Regional and international specialization take advantage of localized resources.
Use of money as a medium of exchange
Money substitutes for barter, which requires a coincidence of wants. (I may want what you produce but you
may not want to exchange for what I have.)
Willingness to accept money in place of goods permits 3-way trades (or multilateral trades). See Figure 4-1
and examples in text.
Floridians give money to Nebraskans for wheat who give money to Idahoans for potatoes who give
money to Florida for oranges.
Foreign exchange markets permit Americans, Japanese, Germans, Britons, and Mexicans to complete
international exchanges of goods and services.
Detroit autoworker produces crankshafts for Buicks. If the worker were paid in crankshafts, he would
have to find grocers, clothing retailers, etc., who would be willing to exchange their products for a
crankshaft. It is much more efficient to use money wages than to accept one's wages in crankshafts!
Active, but limited government
Although the market system promotes efficiency, it has certain shortcomings (over production of goods with
social costs, under production of goods with social benefits, tendency for business to increase monopoly
power, macro instability).
Chapter 5 deals with how the government can increase the overall effectiveness of the market system.
The Market System at Work
Characteristics of the Market System
Private individuals and firms own most of the private property (land and capital).
Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and
businesses to obtain, control, use, and dispose of this property.
Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and
economic growth.
Property rights extend to intellectual property through patents, copyrights, and trademarks.
Freedom of enterprise and choice exist.
Freedom of enterprise means that entrepreneurs and businesses have the freedom to obtain and use
resources, to produce products of their choice, and to sell these products in the markets of their choice.
Freedom of choice means:
Owners of property and money resources can use resources as they choose.
Workers can choose the training, occupations, and job of their choice.
Consumers are free to spend their income in such a way as to best satisfy their wants (consumer
sovereignty).
Self-interest
Self interest is one of the driving forces in a market system. Entrepreneurs try to maximize profits or minimize
losses; resource suppliers try to maximize income; consumers maximize satisfaction.
As each tries to maximize profits, income, satisfaction, the economy will benefit if competition is present.
Competition among buyers and sellers is a controlling mechanism.
Large numbers of sellers mean that no single producer or seller can control the price or market supply.
Large number of buyers means that no single consumer or employer can control the price or market demand.
Depending upon market conditions, producers can enter or leave industry easily.
Markets and prices
A market system conveys the decisions of the many buyers and sellers of the product and resource
markets.Recall the demand and supply model in Chapter 3.
A change in the market price signals that a change in the market has occurred.
Those who respond to the market signals will be rewarded with profits and income.
Reliance on technology and capital goods
Competition, freedom of choice, self-interest, and the potential of profits provide the incentive for capital
accumulation (investment).
Advanced technology and capital goods uses the more efficient roundabout method of technology.
Specialization
Division of labor allows workers to specialize.
People can take advantage of differences in abilities and skills.
People with identical skills may still benefit from specialization and improving certain skills
Specialization saves time involved in shifting from one task to another.
Geographic specialization: Regional and international specialization take advantage of localized resources.
Use of money as a medium of exchange
Money substitutes for barter, which requires a coincidence of wants. (I may want what you produce but you
may not want to exchange for what I have.)
Willingness to accept money in place of goods permits 3-way trades (or multilateral trades). See Figure 4-1
and examples in text.
Floridians give money to Nebraskans for wheat who give money to Idahoans for potatoes who give
money to Florida for oranges.
Foreign exchange markets permit Americans, Japanese, Germans, Britons, and Mexicans to complete
international exchanges of goods and services.
Detroit autoworker produces crankshafts for Buicks. If the worker were paid in crankshafts, he would
have to find grocers, clothing retailers, etc., who would be willing to exchange their products for a
crankshaft. It is much more efficient to use money wages than to accept one's wages in crankshafts!
Active, but limited government
Although the market system promotes efficiency, it has certain shortcomings (over production of goods with
social costs, under production of goods with social benefits, tendency for business to increase monopoly
power, macro instability).
Chapter 5 deals with how the government can increase the overall effectiveness of the market system.
The Market System at Work
