Download Market Economy - Educator Pages

AIM: The Market Economy
Do Now: In your notebook, briefly explain
why you think the American economy is
called a “Market Economy”.
6-7. Market Economy
As long ago as ancient Egypt humans began to use forms
of money to trade for goods and with the free trade of
goods arose what is now known as the market economic
system.
In a market economy producers make goods based on
the amount demand they perceive to exist among
consumers.
Consumers in turn pay for items based on their supply.
For instance, gold is greatly demanded by people across
the world, but its supply is limited. Therefore, gold is
expensive.
Market Economy
• An economic system in which production
and distribution questions are
answered by prices and profits (supply
and demand)
• Most of the resources are owned by
private citizens
• Economic decisions are based on Free
Enterprise (competition between
companies)
– Important economic questions are not
answered by gov. but by individuals
– Gov. does not tell a business what goods
to produce or what price to charge
Market Economy
• Who decides what to produce?
– Businesses base decisions on supply and demand
and free enterprise (PRICE)
• Who decides how to produce goods and
services?
– Businesses decide how to produce goods
• Who are the goods and services
produced for?
– consumers
Market Economy
• There are no truly pure Market economies,
but the United States is close.
• In a truly free market economy, the
government would not be involved at all
– There would be no laws to protect workers
from unfair bosses
– There would be no rules to make sure that
credit cards were properly protected
Why might it be a good thing for
government to get involved with
issues like those above?
Market Economy
(free enterprise, capitalism)
• In a free-market country, people can own
their own businesses and property.
People can also buy services for private
use, such as healthcare.
(But most capitalist governments also
provide their own education, health and
welfare services. )
Market Economy
(free enterprise, capitalism)
Individual producers must figure out how
to plan, organize, and coordinate the
production of products and services.
In a market economy, resources are
allocated through individual decision
making.
Market Economy
(free enterprise, capitalism)
• In a market economy, prices act as
signals of scarcity. When the price of
something is high, that means it's more
scarce. Demand for it is high relative to
the supply.
Market Economy
(free enterprise, capitalism)
• When the price of something is low,
then it's less scarce. By observing
prices, consumers and producers can
choose their behavior to respond to
scarcity.
Market Economy
(free enterprise, capitalism)
• High prices encourage producers to switch
from more scarce to less scarce
resources,
• and they encourage consumers to switch
from products and services that require
more scarce resources to products and
services that require fewer scarce
resources.
Pure Capitalism
Type of economic system generally
characterized by:
• Limited involvement of the government in
the economy.
• Individual ownership of the factors of
production.
• Individuals pursue their own self interest
with few constraints.
What is an economic system ?
All of the institutional means through
which the FOP are used to satisfy
wants.
A representative democracy
facilitates the institution of a
capitalistic economy.
What is an economic system ?
By institution we mean principally the
laws of the nation and cultural
practices which control the way in
which individuals act.
A law is something that serves to
instruct.
What is an economic system ?
There are six basic criteria associated with a
pure capitalistic system:
• The institution of private property
• Free enterprise and free choice
• Self interest
• Competition and unrestricted markets
• The market system
• The limited role of government
The Institution of Private Property
• Ownership of most property is held by
individuals or groups of individuals
(corporations, partnerships, etc.).
• The state is not the owner of productive
resources that are important forms of
property.
The Institution of Private Property
• Private property is controlled and enforced
through the legal framework of laws, police,
and courts.
• Therefore one function of government is the
protection of private property rights.
The Institution of Private Property
• Individuals are usually free to use their
private property as they choose, so long as
they do not infringe on the legal property
rights of others.
• Individuals are usually allowed to enter into
private contractual agreements that are
mutually satisfying.
Free Enterprise and Free Choice (An
Extension of Property Rights)
• Exists when private individuals are allowed to
obtain resources, to organize those
resources, and to sell the resulting product in
any way the individual chooses.
• As long as their actions do not infringe on the
property rights of others
Free Enterprise and Free Choice (An
Extension of Property Rights)
–Assumes there are no artificial
restrictions that a government or
other producer can put up to block a
business's choice in the matter of
purchasing its inputs and selling its
outputs.
Free Enterprise and Free Choice (An
Extension of Property Rights)
–Assumes there are no artificial
restrictions that a government or
other producer can put up to block a
business's choice in the matter of
purchasing its inputs and selling its
outputs.
Free Enterprise and Free Choice (An
Extension of Property Rights)
• Workers are free to enter any line of work for
which they are qualified, and consumers can
buy the desired basket of goods and services
that they feel is best for them.
Free Enterprise and Free Choice (An
Extension of Property Rights)
• The ultimate voter is the consumer,
he/she votes with dollars, and decides
which product will survive
– This reasoning is known as consumer
sovereignty, where the ultimate purchaser
of goods and services determines what is
produced.
Free Enterprise and Free Choice (An
Extension of Property Rights)
• The ultimate voter is the consumer,
he/she votes with dollars, and decides
which product will survive
– This reasoning is known as consumer
sovereignty, where the ultimate purchaser
of goods and services determines what is
produced.
Self Interest
Normally implies the maximization of profits or
the minimization of losses.
• Consumers: strive to maximize the amount
of satisfaction possible from spending a given
amount of money income. (as little as
possible!)
Self Interest
• Producers : strive to maximize the amount of
net income possible from selling
commodities at the highest possible price
(get as much as possible!)
Self Interest
• Consumers: strive to maximize the amount
of satisfaction possible from spending a given
amount of money income. (as little as
possible!)
• Producers : strive to maximize the amount of
net income possible from selling
commodities at the highest possible price
(get as much as possible!)
Self Interest
• Employees (Workers): strive to obtain the
highest level of income possible for least
amount of work.
• Employers :strive to obtain the most amount
of work from employees for the least cost.
Self Interest
• Owners of resources: strive to obtain the
highest possible price when that resource is
sold or leased.
• Users of resources: strive to obtain the lowest
possible price for a resource so that THEY can
make the most profit.
Competition and Unrestricted
Markets
• Competition is Rivalry among sellers
who wish to attract customers and
rivalry among buyers to obtain desired
goods and services.
Competition and Unrestricted
Markets
• Competition requires a minimum of two
conditions:
– A relatively large number of independently
acting sellers and buyers.
– Freedom of sellers and buyers to enter or exit a
particular industry without restrictions
(unrestricted markets).
Competition and Unrestricted
Markets
• Economic competition imposes limits on the
self interest of buyers and sellers.
Competition is a regulating force in capitalist
systems.
– i.e. Raise prices
Consumers go to another one
of many sellers.
– Economic profit earned
New firms will
enter the industry.
Unrestricted Markets
– Economic profit earned
the industry.
New firms will enter
The Market System
• An institution that develops from the
– Private Property Rights
– Free Choice and Free Enterprise
– Self-Interest
– Competition and Unrestricted Markets
• Also referred to as the “Price System”
The Market System
• Capitalism is a market economy. That is,
buyers and sellers relate their opinions
by expressing how much they are willing
to pay for, or how much they demand of
goods and services.
The Market System
• Prices are used to signal the value of
individual resources and commodities.
Therefore, prices provide valuable
information to consumers and producers.
• Prices are the "guiding light" to which
resource owners, businesses, and consumers
follow when economic choices must be
made.
The Market System
• Therefore, we can say that the market system
(price system) IS the organizing force in
capitalist systems.
– Organization is the coordination of individuals in
the furtherance of a common goal.
The Market System
• Resources tend to flow where they yield the
highest rate of return or highest profit.
The Market System
• Prices generate the signals for resource
movements, provide information cheaply and
quickly, and affect incentives.
– i.e. The current movement of resources out of
the farming sector and into the ornamentals,
landscape and turf sectors.
Market Economic System:
(Free Market, Capitalism)
Buyers and Sellers: Dollars “Vote”
The Basic economic questions are answered: by having
buyers and sellers make economic decisions.
Advantages
• Overtime, can adjust to
change
• Individual freedom for
everyone
• Little government
interference
• Decentralized – not
concentrated in the hands
of a few
• Variety of goods and
services
• High degree of consumer
satisfaction
Disadvantages
• Rewards only
productive resources;
does not provide for
people too young, too,
old, or too sick to work
• Workers/businesses
face uncertainty as a
result of competition
and change: no
guarantee for job
• Does not produce
enough public goods
such as defense,
universal education, or
health care
6-7. Market Economy
As long ago as ancient Egypt humans began to use
forms of money to trade for goods and with the free
trade of goods arose what is now known as the
market economic system.
In a market economy producers make goods based
on the amount demand they perceive to exist among
consumers. Consumers in turn pay for items based
on their supply. For instance, gold is greatly
demanded by people across the world, but its supply
is limited. Therefore, gold is expensive.
8-10. Market Economy= Capitalism
Another word for market economic systems is capitalism.
Capitalism is an economic and political ideology written about
by an 18th century thinker- Adam Smith in a book entitled
“The Wealth of Nations.” Smith claimed that the more the
people of different people trade with each other the less likely
they are to go to war. Moreover, he claimed that the
government must not interfere with the economy or it may
disrupt trade and people’s ability to prosper. Smith claimed
that instead of a government running an economy an
“invisible free hand” known as a market would. Today this
concept is referred to as laissez faire or hands off economics.
Market Economy
Adam Smith claimed that people who trade
with each other don’t go to war with each
other.
11. Characteristics of Market Economies
• Entrepreneurship and risk taking are rewarded with big
financial gains.
• Private property rights are strictly enforced even when
they result in many poor people and few very wealthy
people.
• Producers decide what to produce based on consumer
tastes and demands.
• Productivity results in more personal wealth
• Government’s role in the economy is limited
• The economy is based on almost entirely on supply and
demand
• Private individuals and companies own businesses and
industry.
Examples of Market Economies
• To a large extent the US has a market economy.
Compared to the rest of the world taxes are low and
supply is determined by demand
• Singapore is also an example of a market economy.
In Singapore there are very few taxes and businesses
can decide on how and what to produce.
• In reality there is no such thing as a true market
economy because the government in almost every
nation around the world plays a significant role in the
economy including the US
“It’s Your money, not the government’s”President Ronald Reagan
Market economies are based on the open and free trade of
goods.
In the New York Stock Exchange individuals buy and sell stocks
(ownership) of companies (below)
The World Trade Center was seen as a symbol of American capitalism
because things were sold and bought there from around the world.
The New York Stock Exchange is on the left.
12. Criticism of Market Economies
• Market economies often result in unequal societies where
there are a few very wealthy individuals and many poor
people.
• Market economies often encourage free trade that enables
large private companies to exploit the laborers or the
resources of less-developed nations. For instance, most of
the clothing worn by Americans is made in China by workers
who earn less than a $1 an hour.
• Market economies often result in economic monopolies
(when one company controls a business sector) that stop
competition and result in higher prices
Market System
• Market economy – system in which
individuals own the factors of production
and make economic decisions through free
interaction while looking out for their own
and their families’ best interests
• Limited government, individuals control
factors of production and economy driven
by market price
Market System
• Market – freely chosen activity between buyers
and sellers of goods and services
• Circular flow of economic activity – economic
model that pictures income as flowing
continuously between businesses and consumers
• Advantages – free to choose career and how to
spend $, own private property, take risks, &
many goods for purchase
• Disadvantages – How to provide for elderly,
young & sick
Mixed System
• Mixed economy – system combining
characteristics of more than one type of
economy
• Most countries have a mixed economy
• Most individuals make decisions but are
regulated to various extents by the
government
Characteristics of the
American Economy
• Freedom of choice – can choose to produce or
not produce or to buy or not to buy
• 6 Characteristics of a pure market system
–
–
–
–
–
–
1.
2.
3.
4.
5.
6.
Little or no government control
Freedom of enterprise
Freedom of choice
Private property
Profit incentive
Competition
Characteristics of the American Economy
• Limited role of government
– Adam Smith – founder of modern economics - Wealth
of Nations – people will use resources efficiently to
achieve the maximum good for society
– Capitalism – economic system in which private
individuals own the factors of production & decide
how to use them within legislated limits
– Laissez-faire – pure capitalism – economic system in
which the government minimizes its interference with
the economy
– Government has increased its role since the 1880s
Characteristics of the American Economy
• Freedom of enterprise
– Free enterprise system – economic system in which
individuals own the factors of production and decide
how to use them within legal limits; same as
capitalism
– Regulations – zoning, child labor, pollution & taxes –
examples
– May make money or may lose money
• Freedom of choice
– Buyers, not sellers, make decisions about what is to
be produced
– Government influences the market to protect
consumers – safety standards & price controls
Characteristics of the American Economy
• Profit Incentive
– Profit – money left after all the costs of
production have been paid – wages, bills &
taxes
– Profit incentive – desire to make money that
motivates people to produce and sell goods
and services
Characteristics of the American Economy
• Private Property
– Private property – whatever is owned by individuals
rather than by government
– Constitution guarantees an owner’s right to private
property and its use (eminent domain)
• Competition
– Competition – rivalry among producers and sellers of
similar goods and services to win more business
– Leads to lower prices, better quality and an efficient
use of resources
– Low barriers to entry are needed
The Goals of the Nation
• Goals of free enterprise in the U.S.
– Economic freedom – allows members of
society to make choices and possibly fail
– Economic efficiency – wise use of available
resources so that costs do not exceed benefits
– Economic equity – attempt to balance an
economic policy so that everyone benefits
fairly – (equal pay, hiring practices & disabled)
The Goals of the Nation
• Economic security – protection against
accidents, natural disasters, bank failures etc.
• Economic stability – reduce extreme ups &
downs in standard of living
– Standard of living – the material well-being of an
individual, group, or nation measured by how well
their necessities and luxuries are satisfied
• Economic growth – expansion of the economy to
produce more goods, jobs and wealth
• Trade-Offs among goals – limits on what you can
do with resources due to scarcity (Social
Security)
Market System
• Market economy – system in which
individuals own the factors of production
and make economic decisions through free
interaction while looking out for their own
and their families’ best interests
• Limited government, individuals control
factors of production and economy driven
by market price
Market System
• Market – freely chosen activity between buyers
and sellers of goods and services
• Circular flow of economic activity – economic
model that pictures income as flowing
continuously between businesses and consumers
• Advantages – free to choose career and how to
spend $, own private property, take risks, &
many goods for purchase
• Disadvantages – How to provide for elderly,
young & sick
Mixed System
• Mixed economy – system combining
characteristics of more than one type of
economy
• Most countries have a mixed economy
• Most individuals make decisions but are
regulated to various extents by the
government
Characteristics of the
American Economy
• Freedom of choice – can choose to produce or
not produce or to buy or not to buy
• 6 Characteristics of a pure market system
–
–
–
–
–
–
1.
2.
3.
4.
5.
6.
Little or no government control
Freedom of enterprise
Freedom of choice
Private property
Profit incentive
Competition
Characteristics of the American Economy
• Limited role of government
– Adam Smith – founder of modern economics - Wealth
of Nations – people will use resources efficiently to
achieve the maximum good for society
– Capitalism – economic system in which private
individuals own the factors of production & decide
how to use them within legislated limits
– Laissez-faire – pure capitalism – economic system in
which the government minimizes its interference with
the economy
– Government has increased its role since the 1880s
Characteristics of the American Economy
• Freedom of enterprise
– Free enterprise system – economic system in which
individuals own the factors of production and decide
how to use them within legal limits; same as
capitalism
– Regulations – zoning, child labor, pollution & taxes –
examples
– May make money or may lose money
• Freedom of choice
– Buyers, not sellers, make decisions about what is to
be produced
– Government influences the market to protect
consumers – safety standards & price controls
Characteristics of the American Economy
• Profit Incentive
– Profit – money left after all the costs of
production have been paid – wages, bills &
taxes
– Profit incentive – desire to make money that
motivates people to produce and sell goods
and services
Characteristics of the American Economy
• Private Property
– Private property – whatever is owned by individuals
rather than by government
– Constitution guarantees an owner’s right to private
property and its use (eminent domain)
• Competition
– Competition – rivalry among producers and sellers of
similar goods and services to win more business
– Leads to lower prices, better quality and an efficient
use of resources
– Low barriers to entry are needed
The Goals of the Nation
• Goals of free enterprise in the U.S.
– Economic freedom – allows members of
society to make choices and possibly fail
– Economic efficiency – wise use of available
resources so that costs do not exceed benefits
– Economic equity – attempt to balance an
economic policy so that everyone benefits
fairly – (equal pay, hiring practices & disabled)
The Goals of the Nation
• Economic security – protection against
accidents, natural disasters, bank failures etc.
• Economic stability – reduce extreme ups &
downs in standard of living
– Standard of living – the material well-being of an
individual, group, or nation measured by how well
their necessities and luxuries are satisfied
• Economic growth – expansion of the economy to
produce more goods, jobs and wealth
• Trade-Offs among goals – limits on what you can
do with resources due to scarcity (Social
Security)
Types of Economic Systems cont.
• Market Economy
– driven by choices of
consumers and producers
• consumers spend money,
go into business, sell their
labor as they wish
• producers decide how to
use their resources to
make the most money
– Consumers, producers benefit
each other when they act in
self-interest
Fundamentals of a Market Economy
• 1: Private Property and Markets
• 2:Limited Government Involvement
– Laissez faire—government should not interfere in
economy
– Capitalism—system having private ownership of
factors of production
• says producers will create products consumers demand
– Actual market economies all have some
government involvement
Fundamentals of a Market Economy
• 3: Voluntary Exchange in Markets
– Voluntary exchange—traders believe they get
more than they give up
• 4: Competition and Consumer Sovereignty
– Consumer sovereignty—buyers choose
products, control what is produced
– Competition controls self-interested behavior
• sellers offer low price or high value to please
consumers, make profit
Fundamentals of a Market Economy
• 5: Specialization and Markets
– Specialization—people concentrate
their efforts in the activities they do best
• encourages efficient use of resources
• leads to higher-quality, lower-priced
products
Circular Flow in Market Economies
• KEY CONCEPTS
– Circular flow model illustrates how
interactions occur in a market
– Represents the two key decision makers:
households, businesses
– Shows the two markets where households and
businesses meet
• goods and services
• resources
Circular Flow in Market Economies
• Factor Markets
– Factor market—market for the factors of
production
• land, labor, capital, entrepreneurship
• Product Markets
– Product market—market where goods and services
bought and sold
• includes all purchases by individuals from
businesses
Circular Flow in Market Economies
• Circular Flow
– Circular flow model shows how market
economies operate
• outside arrow shows flow of money
• inside arrow shows flow of resources
and products
Impact of Market Economies
• Advantages
– Individuals free to make economic choices,
pursue own work interests
– Less government control means political freedom
– Locally made decisions mean better use of
resources, productivity
– Profit motive ensures resources used efficiently,
rewards hard work
• resulting competition leads to higher-quality, more
diverse products
Impact of Market Economies
• Disadvantages
– Pure market economy has no way to provide
public goods and services
– Does not give security to sick or aged
– During U.S. industrial boom, business owners
rich, workers low pay
– Businesses did not address problems caused
by industrialization
– Industrialized societies adopt some
government control of economy