Chapter 02 - The Market System and the Circular FlowChapter 02 The Market System and the Circular FlowQUESTIONS1. Contrast how a market system and a command economy try to cope with economic scarcity.
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2. How does self-interest help achieve society’s economic goals? Why is there such a widevariety of desired goods and services in a market system? In what way are entrepreneurs andbusinesses at the helm of the economy but commanded by consumers?LO2
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1. Contrast how a market system and a command economy try to cope with economic scarcity. A market system permits private ownership of resources and arrange economic activity through market prices. Participants act in their own interest seeking to increase satisfaction through their own profit regarding decision or consumption of their production. Market system is the process of how goods and services or produce and supplied by whomever that is willing to do so. The end result is competition and widely distributed economic power. The command economy is defined by public ownership of all property resources and economic decisions are made through central planning. The planning board which is appointed by the government determines production goals for each enterprise. The division of output between capital and consumer goods is decided based on boards long-term priorities.
2. How does self-interest help achieve society's economic goals? Why is there such a wide of desired goods and services in a market system? In what way are entrepreneurs and businesses? In what way are entrepreneurs and businesses at the helm of the economy but commanded by consumers? It help help consumers obtain products at lowest price apportion their expenditures to maximizes their utilities. Self – interest gives interest direction and consistency to what might become a chaotic economy. Many consumer want a diverse group of products offered , this allows the market system to keep up with the needs. Entrepreneurs and businesses are at the helm of economy they can drive what the consumer want until their businesses fails for not providing the desired goods.
3. Why is private property,and the protection of property rights,so critical to the success of the market system? How do property rights encourage cooperation? By being an owner of private property and the protection of property rights it encourages maintaining and facilitating the exchange of the property. However, the importance of property rights they encourages to cooperate by ensuring that all mutually agreeable economic transactions take place.
4. What are the advantage of using capital in the production process? What is meant by the term “division of labor”?
In what way are entrepreneurs and businesses at the helm of the economy, but commanded by consumers? Apply our circular flow economy.
Entrepreneurs in the market are free. They sell everything they like. Today they want to sell services. They do. Tomorrow they will change their minds and will produce some goods. They
make their decisions themselves: what to produce or sell, when to produce or sell, where to produce or sell, at what price to sell. They are free. They are really at the helm of the economy.
However, everyone knows: "customer is always right". Whatever the entrepreneur does, he must satisfy the needs of the buyers. If he does not do it, he does not sell his goods. He has losses. Therefore, he tries to find customers’ desire to satisfy them. You can see, entrepreneurs and businesses are
commanded by consumers.
We need remember that everyone is a part of circular flow economy. Entrepreneurs hire workers, these workers buy goods of these entrepreneurs. But they are free in their choice. And they make their decisions. So, the conclusion “entrepreneurs and businesses are at the helm of the economy, but are commanded by consumers” is correctly in our circular flow economy.
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