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Chapter Three

The Shifting Boundariesbetween Markets andGovernments

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The important thing for Government is not todo things which individuals are doingalready, and to do them a little better or alittle worse; but to do those things which atpresent are not done at all.

John Maynard Keynes, “The End of LaissezFaire” (1926)

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Introduction

What is Market?

A market wherebuyers and sellersinteract and engage

in exchange.

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laissez-faire economy 

In a laissez-faire economy , literally fromthe French: “allow (them) to do,” individualpeople and firms pursue their own self-interests without any central direction orregulation. The central institution of alaissez-faire economy is the free-market 

 system.

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Market Mechanism

Market Economy is a mechanism forcoordinating people, activities, andbusinesses through a system of prices andmarkets.

No single individual or organization isresponsible for production, consumption,distribution and pricing.

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Introduction

What is Market?

A market where buyers

and sellers interact andengage in exchange.

Determine price andquantity of products and

services.

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Free-market system (Continue…

Consumer sovereignty is the idea thatconsumers ultimately dictate what will beproduced (or not produced) by choosing what

to purchase (and what not to purchase). Free enterprise: under a free market

system, individual producers must figure outhow to plan, organize, and coordinate the

production of products and services.

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Invisible Hands

Adam Smith made the observation thathouseholds and firms interacting in marketsact as if guided by an “invisible hand.” 

Under perfect competition markets willproduce many useful goods and services outof available resources as is possible

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Invisible Hands (Continue…..

• Everybody is pursuing his or her self interest

• Every individual employ his or her capital sothat it may produce greatest value.

• But his or her own interest frequently promotingthe interest of others.

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Market Mechanism

A market economy is elaborate mechanismfor coordinating people, activities, andbusinesses through a system of price and

markets. Sellers always want to sell their product at

high price Buyers always want to buy products at low

price When they interact with each other then the

process of bargaining decides the final priceat which buyers and sellers are satisfied

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Market Mechanism (Continue….

A price is a amount that a product sells forper unit, and it reflects what society iswilling to pay.

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Characteristics of a Pure MarketEconomy

Economic freedom

Economic incentives

Competition Private ownership

No government interventions

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Market Equilibrium

It represents a balance amongall different buyers and sellers.

Markets are finding market

equilibrium of demand andsupply

Depending on price householdand firm wants to buy or selldifferent quantities of products.

Equilibrium price, meet thedesires of buyers and sellers

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Monarchs of Marketplace

Consumer is king

Technology constraints.

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Firms, entrepreneurs, household

Firm: An organization that transformsresources (inputs) into products (outputs).Firms are the primary producing units in a

market. Entrepreneurs: A person who organizes,

manages, and assumes the risks of a firm,taking a new idea or a new product and turning

it into a successful business. Household: The consuming units in an

economy

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Picture of Prices and Markets

Consumers

Demand

for 

Products

Supply

for 

Products

Paying

 price for 

 product

Earning

 profit on

sale of 

 product

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Picture of Prices and Markets( Continue……

Supply of 

Factors of  production

Demand of 

Factors of Production

Land

Labor 

Capital

Rent

Wages

Interest

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Picture of Prices and Markets( Continue……

Consumers ProducersDemand

for 

Products

Supply

for 

Products

Consumers Producers

Supply of Factors of 

 production

Demand of 

Factors of 

Production

What theyearn they

 pay for 

 purchase

of 

 products

They give

 part of 

 profits in

form of 

wages, rent

and

interest.

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Trade, Money, and Capital

First world countries have three distinctive features

• Trade, Specialization, and Division of Labor

• Money: The Lubricant of Exchange

•

Capital

• Continue…

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Trade, Money, and Capital (Continue..

Trade, Specialization, and Division of Labor Specialization of individuals and firms

Allow workers to become highly productive in particular

occupation. Specialization: When people and countries concentrate

their efforts on a particular set of tasks—it permits eachperson and country to use to best advantage its specificskills and resources.

Division of Labor: Dividing production into number of small specialized steps or tasks.

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Trade, Money, and Capital (Continue..

Trade: It is the willing exchange of goods,services, or both

Specialization and division of labor willincrease productivity of resources.Individuals and countries trade their surplusgoods to one another.

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Trade, Money, and Capital (Continue..

Money:

• Means or medium of exchange.

• It is anything that is generally

accepted as payment for goodsand services

• Government control money

• Central Bank issue the currency

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Trade, Money, and Capital (Continue..

Capital:

• Factor of Production

• Durable input

• It has high cost

• It has market value

• Can be owned by any individual and itshis or her property

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End of Chapter Three