Chapter 3: Economic institutions. In this chapter you will learn: Define market economy and compare and contrast socialism with capitalism, describe the role of businesses and households in a market economy, list and discuss the various roles of government, explain why global policy issues differ from national policy issues. | Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger. ―Friedrich Hayek Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Define market economy and compare and contrast socialism with capitalism List and discuss the various roles of government. Describe the role of businesses and households in a market economy Explain why global policy issues differ from national policy issues. 2 Economic Systems The . economy is a market economy, which is an economic system based on private property and the markets in which, in principle, individuals decide how, what, and for whom to produce Markets work through a system of rewards and payments Individuals are free to do whatever they want as long as it is legal Fluctuations in prices play a central role in coordinating individuals’ wants in a market economy . | Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger. ―Friedrich Hayek Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Define market economy and compare and contrast socialism with capitalism List and discuss the various roles of government. Describe the role of businesses and households in a market economy Explain why global policy issues differ from national policy issues. 2 Economic Systems The . economy is a market economy, which is an economic system based on private property and the markets in which, in principle, individuals decide how, what, and for whom to produce Markets work through a system of rewards and payments Individuals are free to do whatever they want as long as it is legal Fluctuations in prices play a central role in coordinating individuals’ wants in a market economy Most economists believe the market is a good way to coordinate economic activity 3 Capitalism and Socialism Capitalism is an economic system based on the market in which the ownership of the means of production resides with a small group of individuals (called capitalists) Socialism is an economic system based on individuals’ goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce 4 Economic Institutions in a Market Economy GOVERNMENT (Consumption) HOUSEHOLDS GOODS MARKET INTERNATIONAL CONNECTION INTERNATIONAL CONNECTION BUSINESS (Production) FACTORMARKET 5 Business Businesses produce what they believe will sell and make a profit Businesses in the . decide what to produce, how much to produce, and for whom to produce it By channeling the desire to make a profit for the general good of society, the . economic system allows the invisible hand to work Although businesses decide what to produce, they are .
