The Market System and the Circular Flow

5 important questions on The Market System and the Circular Flow

Name the characteristics of the command system.

Most resources are owned by the government, and economic decisions (planning, output, distribution) are made by a government body. (e.g. socialism, communism)

Name the characteristics of the market system.

Resources are mostly privately owned, participants act in their own self-interest, and economic activity is coordinated through markets - which communicate through prices.

Which two kinds of specialization are there?

Division of labour (human specialization) and geographic specialization.
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What mechanisms guide the production?

Profit: if the production is profitable (TR>TC) is expands. If not (TR<TC) it contracts. In the market system, this is determined by the consumers.

How, in a market system, are goods and services produced?

On the basis of what consumers are willing and able to buy. This depends on how much resources/property they supply, and what those are worth on the market (income).

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