The Market System

Other systemsCompetition

FreedomsPrivate 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,

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

From 3 Freedoms- break intoFive Features of FE Economy

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 productionProductive 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 SOCIALISM

Most Reduced Quasi-Balanced Increased Least

COMMUNISM (Command)

Freedom measured by degrees

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• EPABRINGS 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 FaireEconomic activity directed by governmentThese 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

• 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 exchangeProduct quality through regulationsOwnership rights defined- contract

languageEnforcing 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 FailureIs 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 it1. More complicated2. Less efficient3. More costly (now to taxpayers)

• Governments Enter the Market to assure:1. Public Goods2. Externalities (positive or elimination of

negative)3. Market power4. 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 commonDo 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 treatedCounty medical centersSometimes charged on ability to pay

HighwaysState and federal government share the cost

EducationState, Local and Federal government provide

National DefenseNational government provides 5 branches of armed servicesFed pays the entire cost!

Public Goods provided jointly to all would also include such things as:national defensemonetary systemjudicial 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-makerUmpire

What does that mean?

• U.S. Concept of Freedom for AllJoint 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