 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
An Overview of the Market System and the Canadian Economy
Chapter HighlightsCHAPTER 4- The market system—known also as the private-enterprise system or capitalism—is characterized by the private
ownership of resources, including capital, and the freedom of individuals to engage in economic activities
of their choice to advance their material well-being. Self interest is the driving force of such an
economy, and competition functions as a regulatory or control mechanism.
- In the market system, markets and prices organize and make effective the many millions of individual decisions
that determine what is produced, the methods of production, and the sharing of output.
- Specialization, use of advanced technology, and the extensive use of capital goods are facilitated by the market
system.
- Functioning as a medium of exchange, money eliminates the problems of bartering and permits easy trade
and greater specialization, both domestically and internationally.
- Every economy faces Four Fundamental Questions: (a) What goods and services will be produced? (b) How
will the goods and services be produced? (c) Who will get the goods and services? (d) How will the system
used accommodate changes in consumer tastes, resource supplies, and technology?
- The market system produces those products of which production and sale yield total revenue sufficient to
cover all costs, including a profit (a cost). It does not produce those products that do not yield a profit.
- Profit indicates that an industry is prosperous and promotes its expansion. Losses signify that an industry
is not prosperous and hasten its contraction.
- Consumer sovereignty means that both businesses and resource suppliers are subject to the wants of consumers.
Through their dollar votes, consumers decide on the composition of output.
- Competition forces firms to use the lowest-cost and therefore the most economically efficient production
techniques.
- The prices that a household receives for the resources it supplies to the economy determine that household's
income. This income determines the households claim on the economy's output. Those who have
income to spend get the products produced in the market system.
- By communicating changes in consumer tastes to resource suppliers and entrepreneurs, the market system
prompts appropriate adjustments in the allocation of the economy's resources. The market system also
encourages technological advance and capital accumulation.
- Competition, the primary mechanism of control in the market economy, promotes a unity of self-interest and
social interests; as though directed by an "invisible hand," competition harnesses the self-interest motives
of businesses and resource suppliers to further the social interest.
- Spillovers, or externalities, cause the equilibrium output of certain goods to vary from the socially efficient
output. Spillover costs result in an overallocation of resources, which can be corrected by legislation or by
specific taxes. Spillover benefits are accompanied by an underallocation of resources, which can be corrected
by government subsidies to consumers or producers
- Only government is willing to provide public goods, which are indivisible and entail benefits from which
non-paying consumers (free riders) cannot be excluded. Private firms will not produce public goods. Quasipublic
goods have some of the characteristics of public goods and some of the characteristics of private
goods; government provides them because the private sector would underallocate resources to their
production.
- In terms of both employment share and contribution to domestic production, the service sector dominates
in the Canadian economy.
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2002 McGraw-Hill Higher Education