What are the nine characteristics of the market system?
I. Characteristics of the Market SystemA. Private individuals and firms own most of the private property (land and capital).1. Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, control, use, and dispose of this property.
2. Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and economic growth.
3. Property rights extend to intellectual property through patents, copyrights, and trademarks.
B. Freedom of enterprise and choice exist.1. Freedom of enterprise means that entrepreneurs and businesses have the freedom to obtain and use resources, to produce products of their choice, and to sell these products in the markets of their choice.
2. Freedom of choice means:a. Owners of property and money resources can use resources as they choose.
b. Workers can choose the training, occupations, and job of their choice.
c. Consumers are free to spend their income in such a way as to best satisfy their wants (consumer sovereignty).
C. Self-interest1. Self interest is one of the driving forces in a market system. Entrepreneurs try to maximize profits or minimize losses; resource suppliers try to maximize income; consumers maximize satisfaction.
2. As each tries to maximize profits, income, satisfaction, the economy will benefit if competition is present.
D. Competition among buyers and sellers is a controlling mechanism.1. Large numbers of sellers mean that no single producer or seller can control the price or market supply.
2. Large number of buyers means that no single consumer or employer can control the price or market demand.
3. Depending upon market conditions, producers can enter or leave industry easily.
E. Markets and prices1. A market system conveys the decisions of the many buyers and sellers of the product and resource markets.
2. A change in the market price signals that a change in the market has occurred.
3. Those who respond to the market signals will be rewarded with profits and income.
F. Reliance on technology and capital goods1. Competition, freedom of choice, self-interest, and the potential of profits provide the incentive for capital accumulation (investment).
2. Advanced technology and capital goods uses the more efficient roundabout method of technology.
G. Specialization1. Division of labor allows workers to specialize.a. People can take advantage of differences in abilities and skills.
b. People with identical skills may still benefit from specialization and improving
c. Specialization saves time involved in shifting from one task to another.
2. Geographic specialization: Regional and international specialization take advantage of localized resources.
H. Use of money as a medium of exchange1. Money substitutes for barter, which requires a coincidence of wants. (I may want what you produce but you may not want to exchange for what I have.)
2. Willingness to accept money in place of goods permits 3-way trades (or multilateral trades).a. Floridians give money to Nebraskans for wheat who give money to Idahoans for potatoes who give money to Florida for oranges.
b. Foreign exchange markets permit Americans, Japanese, Germans, Britons, and Mexicans to complete international exchanges of goods and services.
c. Detroit autoworker produces crankshafts for Buicks. If the worker were paid in crankshafts, he would have to find grocers, clothing retailers, etc., who would be willing to exchange their products for a crankshaft. It is much more efficient to use money wages than to accept one's wages in crankshafts!
I. Active, but limited government1. Although the market system promotes efficiency, it has certain shortcomings (over production of goods with social costs, under production of goods with social benefits, tendency for business to increase monopoly power, macro instability).