Download The Market System

The Market System
Other systems
Competition
Freedoms
Private vs Public
3 Basic Freedoms Capitalism Depends
On
• Private property- we are
protected by our
Constitution to own
property.
• Private enterprise- we can
go into business if we
desire.
• Freedom of choice- jobs,
school, businesses,
production, consumption,
From 3 Freedoms- break into
Five Features of FE Economy
Private Property – bank balances, dogs, houses, gardens, tools,
earth’s minerals, Property represents Wealth
Economic Freedom –(political freedoms) buy any good, start a
business, use technology, invest, quit your job
Economic Incentive –better life, work harder, go to school,
receive rewards for work- punishments also
Competitive markets –supply/demand/individual
preferences.Exercise choice. Markets and prices*** key
Limited Role of Government –2 roles (rule-maker, and
umpire).Allows individuals equal opportunities
What is an economic system?
• Economic system is more than simply a way to
make a decision
• It is a way of life.
• Differs among societies and reflects a wide
variety of values for individuals.
• One value cannot prove superior to others as
a general rule. Values are set in cultures and
cultures set by economic system.
What is Capitalism?
Accumulation of factors of production
Productive labor (work for wages/become
productive/produce more/ more
accumulation of financial capital and capital)
Profits are the motivational factor to
production and wages.
Question!!!!!!
What are the 3 basic Economic
Systems of the World?
Freedoms measured by economies
CAPITALISM
Most
SOCIALISM
Reduced
Quasi-Balanced
COMMUNISM (Command)
Increased
Freedom measured by degrees
Least
What Changes our Capitalism into
Socialism?
Economic system mixed with government
involvement/regulation
• U.S. Postal Service
• Amtrack
• Medicare, Medicaid
• AFDC
• Social Security
• Unemployment Compensation
• FTC
• EPA
BRINGS US TO A MIXED CAPITALIST SYSTEM
Overview of Socialism
 Began with utopia
 Fueled by working conditions in factories,
exploitation by capitalists
 Search for a better quality of life for everyone
 Level out disparities (income, living condition,
property, possessions)
 Government should make economic decisions in the
market rather than the market making decisions. (i.e.
re-distribution of wealth)
 Masses closer to same throughout society.
 Europe emphasis on change through elections.
Summary Socialism
• State ownership of means for producing goods and services
• Major industries often controlled by government. BBC…
British Airlines…Coal Mines… Steel Mills. Venezuela today
nationalizing industries.
• Private ownership of secondary institutions.
• Personal freedoms do exist- but to lesser degree than market
economy.
• Allocation of resources not efficient…massive government
“bog-down” “featherbedding” etc.
• Not a lean/mean economy…. Very heavy government.
• United Kingdom closer to U.S. economy than France and
Germany.
Command Economies
The opposite of Laissez Faire
Economic activity directed by government
These economies have been dismal failure
(impossible to gather information about
production and distribution to do efficient job
of allocating resources.) Prices direct
resources much better.
Usually characterized by dictatorship.
Summary Command
• Relatively small amount of personal freedom-very
restricted.
• Lower standard of living for all except political
leaders.
• Only one political party runs government
• Production and distribution of goods in hands of
government
• Change through revolution (often bloody-Russia,
China)
• Private business can exist- state controlled
• Master plan of government is key to economic
success.If plan fails, economy fails.
Decisions on Amount of Government
 In a market economy, the people decide.
In a command economy, decision is made for
the peopleReminder- governments subsidize in all
economies. More you subsidize something
the more you get of it.
The key ingredient is amount of freedom that
is available after type of economy is decided.
Competition is the circulatory system
of a market economy
• Monopoly’s not permitted…. Competition
provides choice, better prices and quality of
product.
• Market rests on private ownership of property.
• Who in the U.S. owns our factors of production?
• Self-interest and personal rewards are key.
• Technology innovation and capital formation has
led to higher standard of living and per/capita
income.
So how unusual it was for a new nation to
actually want to self-rule and establish a
market economy.
HOW ON EARTH COULD THE CANDLES BE MADE,
THE BREAD BAKED, THE BUSINESSES
ESTABLISHED????
Invisible Hand concept – Mr. Adam Smith.
Adam Smith
•
•
•
•
•
•
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Division of Labor
Specialization of Labor
Self-interest
Accumulation of capital
Private Property
Natural Law (using reason to analyze)
Invisible Hand
I know of no safe depository of the ultimate
powers of society but the people themselves,
and if we think them not enlightened enough
to exercise their control with a wholesome
discretion, the remedy is not to take it from
them but to inform their discretion by
education.
Thomas Jefferson
The Public Sector:Government’s role.
Questions to ponder:
• What is Public Sector?
• When do markets fail?
• Should government step in?
Many believe that government provides the
following.
Improved allocation of resources. (does it?)
Only to the extent it permits free movement
of g & s.
Medium of exchange
Product quality through regulations
Ownership rights defined- contract
language
Enforcing contracts (courts, rule of law)
When the market fails… it is a double
edge sword
Market Fails if not optimal mix.
* Optimal Mix of Output……
“Most desirable combination of output attainable
with existing resources, technology and social
values.”
Market Failure
*“An imperfection in the market mechanism that
prevents optimal outcomes.”
In real words?
Not enough public parks…
Not enough care for environment…
Not enough welfare…
Too much separation between top 10% income
earners and median income earners…
Not adequate security within our borders….
Too many immigrants….
No health care for citizens
Market Failure
Is this evident in today’s market?
*market moves resources from one industry to
another. (price directs resources) (demand
responds) (price moves the resources then to
another demand choice) (at this point
(competition begins to prevail to level the prices)
• Changes in market prices directs resources
• Question…. Is this movement of resources what
society really desires? (example SUVs)…If society
does not want this market reallocation… should
government intercede?
Should govt tax heavily anyone who buys or
drives an SUV?
Market failure = (forces of S & D not leading
us to BEST point on ppc… Who decides
what is defined as BEST?
Enter…. Government intervention!
Will they perform magic?
How do you know if optimal mix is
met?
Optimal mix of ANY GOOD or SERVICE =
MB = MC
(Marginal benefit = Marginal Cost)
If cost greater than the benefit… the failure
occurs.
If benefit greater than the cost, then market is
functioning according to other factors (price,
demand, etc.)
Does this apply to our war in Iraq?
Bailing out the Big Banks?
Government Can Enter the Market to correct
when market fails…
Question……………….
Does government improve the mix or make it
1. More complicated
2. Less efficient
3. More costly (now to taxpayers)
• Governments Enter the Market to assure:
1. Public Goods
2. Externalities (positive or elimination of
negative)
3. Market power
4. Equity
Translation
If government and/or the consumer was not
acting as a watchdog…. Would
corporations be diligent about utilizing the
proper mix of resources…If they are, can
they compete?
Does that always mean regulation increased?
Could it mean that consumer sovereignty
switches to another desire… BUT… what
about things like energy… would we really
know if the provider was efficient?
What is the tragedy of the commons?
 Lake Michigan… who owns it?
 No, resources owned in common
 Do we maintain our houses.. Own property?
 If we improve our property (paint, build-on) do
we most often recoup when we sell?
 No incentive for us to not pollute Lake Michigan.
 Hence, natural resources are overused and
degraded…(fish die, balance of nature upset)
Continued Concept of Common Assets
 Resources, rivers, lakes, oceans, air… all fall into
them absorbing pollution.
 If manufacturers can dump wastes or discharge
smoke without cost… they will do so.
 Manufacturers will choose the least-cost
combination of inputs and bear only unavoidable
costs.
 Many individuals avoid trash service if they can
burn or dump their garbage.
No incentive for manufacturer to absorb
internal costs for being good citizen
 The contaminated water in W. VA
Fallacy of composition applies here…
persons and firms reason their amount of
environmental destruction is not significant
in the total…
Two concepts to remember
• Public goods… can be equally consumed by
all… no restrictions
Skateboarding in the park… Terrorists… can also
go to the park… Illegal immigrants can go to
school…
• Private goods… consumption by one person
excludes consumption by another..
( my doughnut… my car… etc)
Four Broad Categories of Public Goods
 Health and Hospitals
Indigent have to be treated
County medical centers
Sometimes charged on ability to pay
 Highways
State and federal government share the cost
 Education
State, Local and Federal government provide
 National Defense
National government provides 5 branches of armed
services
Fed pays the entire cost!
Public Goods provided jointly to all would also
include such things as:
national defense
monetary system
judicial system
Opportunity cost… if government provides
health care, private sector cannot compete.
Government “crowds” out the private .
**** Remember, the largest opportunity cost
of an item supplied by government is the
best alternative use that could have been
made of the resources required to provide
that good.
If government becomes too restrictive…
Black Markets crop up.
examples… cigarettes, drugs, bootleggers,
diet supplements, prescription drugs, etc.
Government can and does play an
important role in markets…
Rule-maker
Umpire
What does that mean?
• U.S. Concept of Freedom for All
Joint consumption……….
We all consume federal defense. (If hit by a
terrorist attack in FL… the entire U.S. is
protected. (even non-citizens… even those
who attack us.) Why? They are “free
riders.”
People who pay most taxes actually
contribute more for these services that we
all enjoy. Many of us “ride free.”
Will America go full circle?
Government
Private
Combination
Laissez Faire