ECON Chpt. 2-3 PDF

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Summary

Circular Flow Model
Circular flow model for a market oriented system
B. Limitations of model
Does Not depict transactions between households → businesses
Ignores gov’t + “rest of the world” w/decision-making process
Does Not explain how $$ of products + resources are ac...

Description

Circular Flow Model Circular flow diagram = simple economic model showing a private closed economy in which there is only a private sector consisting of households + business who interact w/each other in market. Real Flow  = resources flowing from households and used in producing products that flow from businesses. Money flow facilitates the workings of the economic system.

● Households = Housing units occupied by 1/more people. Businesses combine resources + try earning profits for owners offering goods/services for sale ● Businesses ⇒ 1 of 3 Basic Types 1. The Sole proprietorship = business owned managed by single person 2. Partnership = business owned + managed by 2/more persons 3. Corporation = independent legal entity that can engage in any legal business activity. Circular flow model for a market oriented system -2 Groups of decision makers in the private economy (when gov’t has not yet been included):households + businesses. 1. The market system coordinates these decisions 2. What happens in the resource markets? a. Households sell resources directly/indirectly (through ownership of corporations) b. Businesses buy resources in order to produce goods + services c. Flow of payments from businesses for the resources constitutes business costs + resource owner’s incomes 3. What happens in the product markets? a. Households are on the buying side of these markets, purchasing goods + services b. Businesses are on the selling side of these markets offering products for sale. c. FLow of consumer expenditures constitutes sales receipts for businesses, 4. Circular flow model illustrates complex web of decision-making process

B. Limitations of model 1. Does Not depict transactions between households → businesses 2. Ignores gov’t + “rest of the world” w/decision-making process 3. Does Not explain how $$ of products + resources are actually determined II. How the Market System Deals with Risk A. Profit System 1. It falls to those acting as a firm’s entrepreneurs to deal w.risk 2. The entrepreneurs are guided by the so-called system profit system. These individuals bear risk; if they win if there is a gain in profit and lost if there is a loss. Therefore, entrepreneurs must make prudent decisions to avoid unnecessary risks. 3. Command economies do Not manage risk well b/c the central planners do Not face the risk themselves B. Shielding Employees and Suppliers from Business Risk 1. Under market system, only a firm’s owners are subject to business risk and the possibility of losing money 2. Because everyone else is legally entitled to get paid before the firm’s..

Chapter 3 ● ● ● ●

Demand, Suppy, and Market Equilibrium Intro to Demand + Supply concepts Determinants of Demand + Supply Concept of equilibrium and the effects of changes in demand + supply on equilibrium Discussion on Efficiency (productive + allocative) & price controls

Markets ● Market = institution / mechanism that brings together buyers + sellers of particular goods + services ○ Markets: ■ Local for ex. → farmers markets ■ National Market → US real estate market ■ International market → NY Stock Exchange Competitive Markets with: None of the units, consumers/suppliers have enough clout to change + effect price of the product Demand Demand: schedule or curve that shows the various combinations of amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period. -The only factor causing consumers to buy More/Less, price = Bueno...