Matakuliah
Tahun
: J0594-Teori Ekonomi
: 2009
THE MARKET SYSTEM AND THE
CIRCULAR FLOW
Pertemuan 2
Economic Systems
• Economic System Defined
– Ownership of Factors of Production
– Method Used to Motivate, Coordinate, and
Direct Economic Activity
• Command System
– Socialism or Communism
• Market System
– Capitalism
– Pure Capitalism – Laissez-Faire
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Economic System
• The Command System
The command system is also known as socialism or communism.
In that system, government owns most property resources and
economic decisions making occurs throught a central economic
plan
• The Market System
The polar alternative to the command system is the market
system, or capitalism. The system is characterized by the private
ownership of resources and the use markets and price to
coordinate and direct economic activity
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Characteristics of The Market System
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Private proverty
Freedom of enterprise and choice
Seft-Interest
Competition
Market and Prices
Technology and Capital Goods
Specialization
Use Money
Active, but Limited Government
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Five Fundamental Questions
The key features of the market system heps
explain how market economic respon to pive
fundamental questions :
1. How will the goods and services be produced ?
2. Who will get the goods and services ?
3. How will the system accommodate change ?
4. What goods and services will be produced ?
5. How will the system promote progress?
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The Market System
Demise of Command Systems
• Two Insurmountable Problems
– The Coordination Problem
– The Incentive Problem
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The Invisible Hand
In his 1776 book The Wealth of Nations, Adam Smith first
note that the operations of a market system creates a
curious unity beetween private interst and social interest
– Efficiency
– Incentives
– Freedom
Firms and resource supplier, seeking to further their own
self-interest and operating within the framework of a highly
competitive market system, will simultaneously, as though
guided by “invisible hand”, promote the public or social
interest
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The Circular Flow Model
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