CHAPTER 3

THE PRICE SYSTEM

Participants• Consumers

- earns income from their labor and from the property they own.

• Firms

- or business are the unit of production. They hire workers and pay for the use of various property owned by consumers. Firms use these resources to produce the goods and services consumers buy.

• Government

- enhances growth and stability of the economy. It provides the infrastructure and systems that facilitate economic activity while formulating regulations and controls to ensure order and fairness in businesses operations. The government may directly chip in to prop up the economy.

What is Market?An actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money or barter.

Types of Market

• Product Markets

- a market in which a particular goods or service is bought or sold.

• Resource Markets

- A market in which a particular resource is bought and sold.

An alternative

• Barter

- A system of exchange whereby goods and services are traded directly without the use of the money.

The Circular Flow

Firms Consumer

Resource payments(wages, rent, interest, profit)

Resource(labor, land, capital, entrepreneurship)

Consumer Expenditures

Goods and Services

• An intermediate product is a product that might require further processing before it is saleable to the ultimate consumer. This further processing might be done by the producer or by another processor.

• Taxes• savings

• In production, a final product is a product that is ready for sale without significant further processing. For example, an oil company might sell its petroleum as final product.

• Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets.

Price System• A mechanism for coordinating economic decisions in

which prices are determined in markets and used to allocate resources and output.

• High price

• Cut of production

• The price system leads to efficient production.

In capitalistic economy

• The pattern of product and resources prices tell firms what to produce and how.

The invisible hand is a term used by Adam Smith to describe the unintended social benefits of individual

actions. The phrase was employed by Smith with respect to income distribution (1759) and production (1776).

Adam smith

Adam Smith• founder of economics

• born in scotland in 1723

• University of Glasgow

• Oxford University

• became a professor in University of Glasgow

• The Theory of Moral Sentiment (1759)

• The Wealth of Nations

• died in 1790

Limitations of price system

• Competition

• Market Failure• Public Goods

• Externalities

• Income Inequality

THE PRICE SYSTEM