EconomicEconomic Systems Systems

Characteristics of Market SystemsCharacteristics of Market Systems

FREEDOM OFFREEDOM OFENTERPRISEENTERPRISE

& CHOICE& CHOICE

PRIVATEPRIVATEPROPERTYPROPERTY

ROLE OFROLE OFSELF-INTERESTSELF-INTEREST COMPETITIONCOMPETITION

MARKETSMARKETS& PRICES& PRICES

FREEDOM OFENTERPRISE

& CHOICE

PRIVATEPRIVATEPROPERTYPROPERTY

ACTIVE, BUTACTIVE, BUTLIMITED,LIMITED,

GOVERNMENTGOVERNMENT

ROLE OFROLE OFSELF-INTERESTSELF-INTEREST COMPETITIONCOMPETITION

Characteristics of Market SystemsCharacteristics of Market Systems

2. Freedom of EnterpriseFreedom of Enterprise (business) & Choice(business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. The consumer is “sovereign”consumer is “sovereign” (kingking) in the economy. His dollars vote as it is he who decides what gets produced. The U.S. has over 100,000 business failures100,000 business failures each year.

1. Private PropertyPrivate Property – the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. Contracts are legally bindinglegally binding in oral or writtenoral or written form. [A verbal agreement is binding only if it involves a small sum of money over a short period of time and does not involve real estate purchases.]

3. Role of Self-InterestRole of Self-Interest–each producer or consumer tries to do what is best for themselvesbest for themselves. Self interest is the main force driving the economy. ProducersProducers aim for maximum profitsmaximum profits. ConsumersConsumers seek the lowest prices & highest qualitylowest prices & highest quality.

K-Mart?K-Mart?

Pure Capitalism Pure Capitalism (No G)(No G) and the Circular Flow and the Circular Flow[Capitalism – “private ownership of capital”][Capitalism – “private ownership of capital”]

Monopolies can charge

an arm and a leg.

And – an appendageto be named later,like a -

4. CompetitionCompetition – economic rivalry of a large number ofbuyers & sellers. [central mechanism of market economy]Monopolies become fat & unresponsive Monopolies become fat & unresponsive to consumers(higher prices & fewer choiceshigher prices & fewer choices). Competition preventsone seller from controlling the market. Monopolies are

““price makers”price makers”. It is better to have “price takers”“price takers”who are at the “mercy of the market.”“mercy of the market.”

““Competition”Competition” and ““self-interest”self-interest” are like an “invisible hand”.“invisible hand”.

5. MarketsMarkets & & pricesprices. Markets bring the buyers and sellers into contact.

Prices send signals. High pricesHigh prices send signals to increase increase production production and for other producers to enter the marketenter the market.

Low pricesLow prices send signals to decrease productiondecrease production and for producers to exit the marketexit the market.

6. Limited Government InterventionLimited Government Intervention in the economy.The role of government was one of “laissez faire.”“laissez faire.” [“hands off”“hands off”]In the words of Adam Smith, the government should not interfere withgovernment should not interfere withthe operation of the economy except serve as an arbitrator in settlingthe operation of the economy except serve as an arbitrator in settlingdisputesdisputes.

The government’s rolegovernment’s role, according to Smith was: a. provide defense, b. administer justice, and c. maintain certain public institutions.

ArbitratorArbitrator[settling disputes][settling disputes]

3 C3 Characteristics of haracteristics of AAllll Economic S Economic Systemsystems Reliance on TechnologyReliance on Technology

and Capital Goodsand Capital Goods

RoundaboutRoundaboutProductionProduction

Assembly lineAssembly line [[roundabout productionroundabout production]]

results in results in moremore efficient productionefficient production and more output. and more output. Farmers Farmers are are moremore efficient efficient usingusing capital capital goodsgoods[plows & tractors] [plows & tractors] instead of their handsinstead of their hands..

3 Characteristics of All Economic Systems3 Characteristics of All Economic SystemsReliance on TechnologyReliance on Technology

and Capital Goodsand Capital Goods

SpecializationSpecialization and and EfficiencyEfficiency

Makes Use of Differences in AbilityMakes Use of Differences in Ability [[slowslow person can person can fishfish & & fastfast person can be a person can be a huntehunterr]]

Fosters Learning by DoingFosters Learning by Doing

Saves TimeSaves Time

3 Characteristics of All Economic Systems3 Characteristics of All Economic Systems

Reliance on TechnologyReliance on Technologyand Capital Goodsand Capital Goods

Specialization and EfficiencySpecialization and Efficiency

Division of LaborDivision of Labor

3 Characteristics of Economic Systems3 Characteristics of Economic Systems

Reliance on TechnologyReliance on Technologyand Capital Goodsand Capital Goods

Specialization and EfficiencySpecialization and Efficiency

Geographic SpecializationGeographic Specialization

TexasTexas FloridaFlorida NebraskaNebraska

Use of Use of MoneyMoney

3 Characteristics of All Economic Systems3 Characteristics of All Economic Systems

Reliance on TechnologyReliance on Technologyand Capital Goodsand Capital Goods

Specialization and EfficiencySpecialization and Efficiency

As a Medium of ExchangeAs a Medium of Exchange

Use of MoneyUse of Money

3 Characteristics of All Market Systems3 Characteristics of All Market Systems

Reliance on TechnologyReliance on Technologyand Capital Goodsand Capital Goods

Specialization and EfficiencySpecialization and Efficiency

Money Eliminates Barter System DifficultiesMoney Eliminates Barter System Difficulties

The Three Fundamental QuestionsThe Three Fundamental Questions......

1. What will be produced 1. What will be produced with ourwith our scarce resources? scarce resources?

TTHE HE MMARKET ARKET SSYSTEM YSTEM AAT T WWORKORK

The Three Basic Questions...The Three Basic Questions...

2. How will the goods be produced?2. How will the goods be produced?

1. What will be produced?1. What will be produced?

THE MARKET SYSTEM AT WORKTHE MARKET SYSTEM AT WORK

The Three Fundamental Questions...The Three Fundamental Questions...

2. How will the goods be produced?2. How will the goods be produced?

1. What will be produced?1. What will be produced?

3. Who will get the goods3. Who will get the goods and services? and services?

THE MARKET SYSTEM AT WORKTHE MARKET SYSTEM AT WORK

The Case for the Market SystemThe Case for the Market System Efficiency, Incentives, and FreedomEfficiency, Incentives, and Freedom

COMPETITION AND THE INVISIBLE HANDCOMPETITION AND THE INVISIBLE HAND

Adam Smith said the “invisible hand”“invisible hand” determines what gets produced, how, & for whom. It is the invisible handthat moves us along the PPC. The invisible hand is now called the market mechanismmarket mechanism. Its essential feature is the price signalprice signal.

BusinessesBusinessesBusinesses

Most needyMost needy Most moneyMost moneyoror

1. Traditional2. Pure Command3. Pure Market4. Mixed a. Capitalism b. Democratic Socialism c. Authoritarian Socialism [Communism]

The way the 3 basic questions are answeredDetermines an economic system.

1.1. Traditional-[where “CUSTOM RULES”]Traditional-[where “CUSTOM RULES”] A. What, how, and for whom are answered by tradition B. Change is resisted, no technology [clashes with tradition] C. Heredity and caste system limit the economic role of individuals. D. 35,000 Pygmies in the Ituri Forest are an example. E. Men hunt & women/children gather/prepare food. F. Wear loincloths from bark of fig trees [“PYGLER” or “PYBUGLE Boy”] G. Eat mushrooms, berries, roasted grasshoppers, monkeys, & plantain H. Eat bone marrow & everything else in an elephant.

I. Used to be “PYGACHE”“PYGACHE”,, big Pygmies, have to wear “LARDACHE.”“LARDACHE.”

Economic SystemsEconomic Systems – the way society produces products

2. PURE COMMANDPURE COMMAND - where the “GOVERNMENT RULES”.“GOVERNMENT RULES”. The government controls all resources. What, How, and For Whom answered by the government.

3. PURE MARKETPURE MARKET – where ““INDIVIDUALS RULE”.INDIVIDUALS RULE”. Individuals and firms control all resources. Thegovernment has no say. WHAT, HOW &FOR WHOM are decided by individuals.

MIXEDMIXED – all countries have mixed economic systemsHow are these words used in everyday life?

1.1. Traditional 2. Command 3. MarketTraditional 2. Command 3. Market

Karl MarxKarl Marx

Adam SmithAdam Smith

A Mixed EconomyA Mixed Economy• A mixed economymixed economy is one that uses

both marketboth market signals and government signals and government directivesdirectives to allocate goods & resources.

• Most economies use a combination of market signals and government directives to select economic outcomes.

The “role of government” [“LAISSEZ-FAIRE” – “HANDS OFF”][“LAISSEZ-FAIRE” – “HANDS OFF”]is limited to national defense, public education, maintaining theinfrastructure, and enforcing contracts. Smith said the marketsystem was best because it encouraged specialization, resulting inincreased output & more economic growth.Government was like an “INVISIBLE FOOT”“INVISIBLE FOOT” – government action to benefit particular groups. Keynes will say the G can act as a pressuregauge, letting off excess steam or building it up as needed. [active-not all inclusive role]

ADAM SMITHADAM SMITH WEALTH OFWEALTH OF NATIONSNATIONS – 1776 – 1776

[explained the free market concept][explained the free market concept]

The “INVISIBLE HAND”“INVISIBLE HAND” – when individual consumers/producers compete to achieve their own private self-interest.

Smith’s book was an attack attack onon mercantilismmercantilism. Wealth doesn’t come from an accumulation of gold and silver butfrom more productive people. A nation is wealthier if its citizensAre more productive. It is the ability of people to produce products and trade in free markets that creates a nation’s wealth.

MercantilismMercantilism

So mercantilism died So mercantilism died as economic theoryas economic theory.

My name is mercantilism.

NoNo “G” “G”

In loving memoryIn loving memoryof mercantilismof mercantilism

Adam Smith’s famous Pin Factory ExampleAdam Smith’s famous Pin Factory ExampleOne man could do maybe 1 pin per day [1 man = 1 pin][1 man = 1 pin]Now if there is Now if there is specializationspecialization1 man draws the wire out1 man straightens the wire1 man cuts the wire1 man sharpens the point1 man flattens the head

There are 18 distinct operations - some perform 2 or 3 operations10 people do 48,000 pins per day1 man = 4,800 pins per day1 man = 4,800 pins per day

Three circumstances come from this specializationThree circumstances come from this specialization.1. Increased dexteritydexterity (learning by doing)2.2. Saving timeSaving time (lose time when you move to different operations)1. Invention of machines (fosters inventivenessinventiveness)

The EndThe End