This document provides an overview of the price system. It defines key participants in the economy like consumers, firms, and government. It explains the circular flow between consumers and firms, with firms paying wages and consumers spending on goods. It also defines different types of markets, and describes how prices coordinate production and allocation of resources in a capitalist economy through the invisible hand. However, it notes there are some limitations to the price system like market failures, public goods, and externalities. It provides background on Adam Smith, the founder of economics who first described the invisible hand and its role in the price system.

1. CHAPTER 3

2. THE PRICE SYSTEM

3. 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.

4. 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.

5. 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.

6. An alternative
• Barter
- A system of exchange whereby goods and services
are traded directly without the use of the money.

7. The Circular Flow

8. Firms Consumer
Resource payments
(wages, rent, interest, profit)
Resource
(labor, land, capital, entrepreneurship)
Consumer Expenditures
Goods and Services

9. • 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.

10. 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.

11. 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).

12. Adam smith

13. 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

14. Limitations of price system
• Competition
• Market Failure
• Public Goods
• Externalities
• Income Inequality

15. THE PRICE SYSTEM