ECN204 Notes

CH2
Market Systems

Command System:
Command system is not efficient
Assume objective is to benefit the whole society

The Market System:

Private ownership of resources
Each participant acts in their own best interest
Government play a very limited role
o However, in Canada, the government plays a substantial
role
Freedom of enterprise
o Entrepreneurs and businesses have freedom to obtain
resources, to produce and sell products
Private individuals and firms own most of the land and capital
Freedom of choice
o Owners of property and money resources can use
resources as they wish
Self-interest
o Maximize profit or minimize loss
o Maximize utility (satisfaction)
o Consumers try to obtain products they want at the lowest
possible price
Competition is a controlling mechanism
o Large # of sellers
No single seller/producer can control the price or
supply
o Large # of buyers
No single buyer can control the price or demand
o Producers can enter or leave depending on the market
conditions
Markets and Prices
o Conveys decisions of the buyers and sellers about the
product and resource markets
o Puts buyers and sellers into contact
Technology and Capital Goods
o Incentive for capital investment
Competition, freedom of choice, self-interest, and
potential profits
o Advanced technology promote greater output and
efficiency
ECN204 Notes

Specialization
o Division of labour
o Take advantage of differences in abilities and skills
o Identical skills may benefit from specialization and
improving certain skills
o Saves time used by shifting between tasks

o Geographic specialization
Take advantage of regional and international
localized resources
Use of Money
o Money substitutes for barter
o Willingness to accept money in place of goods
Permits 3-way (multilateral) trades
o Enables foreign trade
Market Failures
o Pollution

Five Fundamental Questions:

1. What will be produced?
o Consumer sovereignty
2. 2. How will the goods and services be produced?
o Market system encourages and rewards those producers
wha are achieving least-cost production
3. Who will get the output?
o Products go to those who are willing and able to pay for
them
4. How will the system accommodate change?
o Increase in demand = higher prices and vice-versa
5. How will the system promote progress?
o Market system promotes technological improvements and
capital accumulation

The Invisible Hand:

Adam Smith
By attempting to maximize profits, firms will also be producing
the goods and services most wanted by society
Promotes efficiency
Provides incentives
Provides personal freedom in making economic decisions
ECN204 Notes

CH 6
Macroeconomist focus on:
o Real GDP
o Unemployment
o Inflation
Real GDP
Measures value of final goods and services produced within the
borders of a country during a given time period, usually a year
Nominal GDP
Uses dollar value
Unemployment
Defines the state a person who is searching for work, but cannot
secure work
Inflation
Increase in overall level of prices
Can cause a decrease in standard of living
Deflation
o Opposite of inflation
Comparing living standards between countries
Convert each countrys GDP to USD
Divide each countrys GDP by the size of it population
Adjust per capita GDP using the Purchasing Power Parity Method
(more on this later)
o Necessary because some goods are typically cheaper in
poor countries