A market economy is self-organizing. When people act to further their own best interests, useful good are produced in the most efficient way. Adam Smith pioneered this.
Characteristic of a Market Economy:
Self Interest: People act in ways which seem best for them and their families.
Incentives: People respond to incentives. Sellers want to sell more when prices are high, while buyers want to buy more when prices are low, and vice versa.
Market Prices and Quantities: Are determined in the free market by a combination of consumer demands and producer output, as well as other factors.
Institutions: Governments generally uphold certain laws to keep the society stable and prevent things such as theft or property destruction, which is harmful to economic output of individuals.
Economics is the study of the use of limited resources to satisfy unlimited human wants.
Resources = land labor and capital
goods are tangible commodities like shoes and snowmobiles
services are intangible commodities like haircuts and education
There is always scarcity because we cannot have everything. We are therefore forced to choose which way we will allocate our resources for which output. When we have more of something we often need to have less of something else.
The Opportunity Cost is the cost of using resources a particular way as measured by the benefit lost by not using them a different way. Eg: the opportunity cost of a hospital is 20km of roadways.
Production possibilities boundary illustrates the extent of what can be produced if resources are used most efficiently, as well as the fact that making more of one variety of product incurs an opportunity cost in terms of a different product. This curve is exponential. The reason for this is that certain resources are better suited for usage in one product, and will therefore have a higher opportunity cost than preliminary resources sacrificed to make a different product.
It illustrates scarcity, choice, and opportunity loss
It is concave
4 Major Economic Questions:
1- what is produced, and how? -Resource allocation: using an economy scare resources among alternative uses
2- What is consumed by whom- will everything that is produced be consumed? How does trade factor in?
Both of these are what make up microeconomics: The study of the causes and consequences of the allocation of resources as it is affecteted by the workings of the price system, and the government policies that try to influence it.
3- Why are resources sometimes idle? In terms of employment and production, full capacity is not always reached. Is that a bad thing? Are there policies which can remedy this?
4- Is productive capacity growing? -Some combinations that are impossible now will be possible in the future. What determines growth? What are the side effects? What's the government's role? Economic growth creates larger production possibility boundaries.
Both of these make up macroeconomics The study of the determination of economic aggregates such as total output, total employment, the price level, and the rate of economic growth.
SO WHO MAKES THE CHOICE, and how?
There are two components to an economy: the factor market and the goods market. Individuals sell factors required to create goods or services to producers in the factor market (AKA: service clerks bagging groceries for money are participating in the factor market). When companies well completed good or services to consumers, that is the goods market. The customers buying groceries are participating in the goods market.
Two effects of modernization are division of labour and specialization (I should check this)
Two benefits are that each worker gets to work on something which they are particularly good at, and also that by only focusing on one particular task, a worker can learn to become much more proficient at it than they would if they had to divide their time between two separate tasks.
Globalization is an increase in global trade. It has helped to create TNCs. It has been facilitated by cheap transfers of information, and cheap transportation costs in general.
There are technically four types of economies, but the only real type which exists in the world is a mixed economy. However, different mixed economies throughout the world rely on different mixtures of ideas from other economic systems to produce wealth.
Traditional Economy: Ancient Economies/Peasant Economies. Everyone does what their parents did, and there is very little change or growth.
Command Economy: Economies are centrally planned, as in Soviet Russia. This is a complex task, and often human planners make mistakes which would not have been present in an economy governed by market forces
Market Economy: The economy is mainly governed by a mixture of decisions made by producers and consumers with very little intervention from external forces
Mixed Economy: A combination of several types of economies. EG: Canada, every other country in the world.
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