Economics 4: Market System
Market coordination: Economies rely on markets to coordinate productive decisions
All economies must answer 3 fundamental questions:
What?
How?
For Whom?
What goods/services will be produced?
2 Ways to determine what will be produced:
Way of controlled economies leaders decide determined by real people at table
Way of free market Sellers produce because buyers demand it guided by invisible
hand of competition
Example: Crack
Market economy: “interaction of self-interested buyers and sellers determine what
goods/services are produced”
Adam Smith argued competition among self-interested producers benefit society
a baker doesn’t bake out of his own good heart; he bakes for his own self
interest
Guided by the invisible hand of competition/market
Self-interested producers are forced to produce goods to satisfy consumer
wants
Producers attempts to make profit by producing higher quality products to
meet consumer needs leading to Consumer Sovereignty
Consumer Sovereignty: “Consumer decides what goods/services will be produced”
Consumer want good Demand increased Higher prices Increased output Increased
profit New firms enter market Increased market supply Price decrease & quantity
increased
How is output produced? “Determining the resources to be used to produce output”
Market economy: producers will select the most affordable resources (holding quantity & quality
constant)
New techniques adopted if costs are reduced
Sellers supply resources to activities valuing them the most
Invisible hand of competition
Market coordination: Economies rely on markets to coordinate productive decisions
All economies must answer 3 fundamental questions:
What?
How?
For Whom?
What goods/services will be produced?
2 Ways to determine what will be produced:
Way of controlled economies leaders decide determined by real people at table
Way of free market Sellers produce because buyers demand it guided by invisible
hand of competition
Example: Crack
Market economy: “interaction of self-interested buyers and sellers determine what
goods/services are produced”
Adam Smith argued competition among self-interested producers benefit society
a baker doesn’t bake out of his own good heart; he bakes for his own self
interest
Guided by the invisible hand of competition/market
Self-interested producers are forced to produce goods to satisfy consumer
wants
Producers attempts to make profit by producing higher quality products to
meet consumer needs leading to Consumer Sovereignty
Consumer Sovereignty: “Consumer decides what goods/services will be produced”
Consumer want good Demand increased Higher prices Increased output Increased
profit New firms enter market Increased market supply Price decrease & quantity
increased
How is output produced? “Determining the resources to be used to produce output”
Market economy: producers will select the most affordable resources (holding quantity & quality
constant)
New techniques adopted if costs are reduced
Sellers supply resources to activities valuing them the most
Invisible hand of competition
