Types of Systems:

1. Command System: Characterized by government ownership of property and economic

resources.
2. Market System: Characterized by private ownership of resources and the ability to use markets
to buy and sell goods and services.
3. Cuba is governed by a command system whereas the United States is governed by mostly market
system. Most countries use a combination of command and market system.

Characteristics of the Market System:

1. Freedom of Enterprise: The establishment of private businesses with minimal government

regulations
2. Freedom of Choice: Individuals can choose what they want to do with their property.
3. Self-interest: Do what is best for the individual or company
4. Competition: buyers and sellers are involved. Competition occurs in the product and resource
markets.
5. Markets and prices: brings buyers and sellers together to make decisions about products and
resources which in turn determine prices.
6. Technology and capital goods: capital goods are used to produce other goods (tools and
machinery)
7. Specialization: The use of resources by an individual or firm to concentrate on producing one
good or service.
a. Division of labor
8. Use of money: Use money to purchase goods or services
a. Bartering: exchanging goods for goods
9. Active but limited government: Government strives to minimize market failure. The government
also watches firms producing under monopolistic practices.

Key Economic Ideas:

Three key topics encompass the world of economics: people are rational, people respond to
incentives, and people think on the margin. Let’s look at each of these topics in detail.

Rational Behavior

Economists assume that individuals are rational. Is this always the case? Suppose you lost your
job several months ago. You’ve depleted your savings account. You have bills to pay and a
family to feed. What should you do? A person thinking rationally will look for another job. A
person thinking irrationally will spend large sums of money, increase debt, or even rob a bank.
We will have further discussions on rational behavior in upcoming chapters.

Thinking on the Margin

Every decision a business owner makes is critical to the success of the organization. The
business owners must not only consider the costs and benefits associated with running a
business, they must also consider the extra cost and extra benefit of running the business.
Considering the extra cost and benefit is known as thinking on the margin. Marginal cost is the
extra cost incurred from creating another unit of a good or service. Marginal benefitis the extra
benefit gained from creating another unit of a good or service. Let’s take a look at an example.
Suppose Jennifer owns a clothing boutique. She hires workers to crochet sweaters. One worker
can make four sweaters. Two workers can make 10 sweaters. How many extra sweaters were
created by hiring the second work? The marginal benefit of hiring the second worker is six
sweaters. Later in this book, we will explore how producers produce the optimal quantity by
equating marginal benefit with marginal costs.

People Respond to Incentives

Economists believe people respond to incentives. Do you believe people respond to incentives?
Why are you pursuing a college degree? Do you want a better paying job or do you desire a
promotion at your current job? Higher pay or promotion is an incentive to pursue a college
degree.