Chap 6 Econs

• Market system


  The method of allocating scarce resources through the market forces of demand and supply
• Markets


  • Consist of buyers (who have demand for a particular good or service)
  • Consist of sellers (suppliers of a particular good or service)
• Price mechanism


  Also known as the market system, it establishes market equilibrium where demand equals supply
• At market equilibrium, the market is cleared of any shortages or surpluses
• Demand curve


  Shows that consumers will tend to buy more as the price falls
• Supply curve


  Shows that firms will tend to offer more for sale as the price rises
• When the opposing market forces of demand and supply are in balance, an equilibrium price and quantity are established, where all products offered for sale at that price are bought by consumers
• Market disequilibrium


  Occurs when the market price is either above or below the equilibrium price
• If the price is above equilibrium

  1. The quantity supplied will exceed the quantity demanded

  2. The price must be reduced to sell off the excess supply
• If the price is below equilibrium


  1. The quantity demanded will exceed the quantity supplied

  2. The price must be raised to create an incentive to supply more
• Main economic systems


  • Planned economic system
  • Market economic system
  • Mixed economic system
• Planned economic system


  An economy in which the state (government) makes the decisions about what to produce, how to produce it and who receives it. The state owns all, or at least most, of the land and capital, and employs workers.
• Price mechanism


  • Relies on the market forces of demand and supply to allocate resources
  • The private sector decides on the fundamental questions of what, how and for whom production should take place
  • No government interference in economic activities
  • Resources are owned by private economic agents who have the economic freedom to allocate scarce resources without interference from the government
  • Goods and services are allocated on the basis of price
  • The allocation of factor resources is based on financial incentives
  • Competition creates choice and opportunities for firms and private individuals
• How the market system works

  1. Buyers (who have demand for a particular good or service) and sellers (suppliers of a particular good or service) interact

  2. Market equilibrium is established where demand equals supply

  3. If price is above equilibrium, quantity supplied exceeds quantity demanded so price must be reduced

  4. If price is below equilibrium, quantity demanded exceeds quantity supplied so price must be raised
• Demand curve


  Consumers will tend to buy more as the price falls
• Supply curve


  Firms will tend to offer more for sale as the price rises
• All economies have to answer three fundamental economic questions: what to produce, how to produce it, and for whom should production take place
• These questions arise because of the basic economic problem of unlimited wants exceeding finite resources