Chapter 3: Economic Systems
- The Fundamental Economic Questions
- The Questions
- What is the best way to use the resources at disposal?
- What should be produced given our resources?
- Once it is decided to produce a certain set of goods and services, how much of each item should be produced?
- Who will get how much of each good and service?
- Strategies for Dealing with the Fundamental Economic Questions
- The Command Economy
- The central government dictates what will be produced, how much of each item is produced, and who will get how many of the final products
- Communism and socialism
- Prices can be set by the government
- Wages can be set so there is no lower class
- Goods and services usually distributed fairly/equally
- Capitalism
- An economic system where supply and demand determine prices
- Prices, which are determined in free markets, coordinate the economy
- resolve what and how much will be produced
- Supply and demand
- determines a person’s income
- and therefore how much of the production the person can obtain for his own use
- Allocative efficiency
- resources being deployed to produce just the right amount of each product to satisfy society’s wants
- Unequal distribution is the norm
- The Mixed Economy
- A blend of government controls and capitalism
- Currently every country in the world
- Price Determination in Capitalism
- Law of Demand
- When the price of a product increases the quantity demanded decreases, ceteris paribus
- ceteris paribus- all other things remaining unchanged
- Demand curve slopes downward from left to right
- price on vertical axis
- quantity demanded on horizontal axis
- Note: The price of any given product is determined by the demand for it relative to the supply
- Law of Supply
- When the price of a product increases, the quantity supplied increases, ceteris paribus
- Supply curve
- slopes upward from left to right
- same axes as that of the demand curve
- Equilibrium
- A state of balance between the opposing forces of shortages and surpluses
- Prices stabilize at equilibrium value, which unfortunately always changes
- the supply and demand curves shift left and right
- Equilibrium point
- the intersection of the supply and demand curves
- Equilibrium quantity
- the amount of the product that will be bought and sold in a free market
- Equilibrium price
- the price that will prevail in a free market
- Determinants of Demand
- Price of the product
- primary determinant
- doesn’t cause the demand curve to shift, but a change in the quantity demanded
- all other determinants can cause the demand curve to shift, a “decrease/increase in demand”
- Income
- Consumer tastes
- Prices of substitute products
- Prices of complementary products
- Expected future price of the product
- Determinants of Supply
- Price of the product
- a change in price is a “change in the quantity supplied”
- a change in anything else, “change in supply,” shifts the supply curve
- Prices of inputs required to make the product
- Technology and productivity
- Expected future price of the product
- Note
- Supply and demand affect each other indirectly, not directly
- The Circular Flow Diagram
- Definition
- Diagram that shows how households and firms are related by the exchange of resources and products
- How it Works
- Individuals and households sell their resources to firms
- The firms use the resources to produce goods and services
- Individuals and households use the proceeds from the sale of their resources to purchase the output of the firms
- Market for Goods and Services
- The exchange of income for products
- Market for Resources
- The exchange of resources for money
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How to cite this note (MLA)
Aboukhadijeh, Feross. "Chapter 3: Economic Systems" StudyNotes.org. Study Notes, LLC., 12 Oct. 2013. Web. 26 Mar. 2025. <https://www.apstudynotes.org/microeconomics/outlines/chapter-3-economic-systems/>.
