The Market System

1. The Market System

2. The Market Economy (Capitalism) is mostly responsible for the following… • You can shop for a TV 24 hours a day form home. • In 1971 a 25” color TV cost the average worker 171 hours of wages • Today a 32” set costs and average of 20 hours of wages (with more channels, more reliable, HD, etc.) • Did you know we live in the wealthiest society in the history of the planet.

3. FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY ROLE OF SELF-INTEREST COMPETITION Characteristics of Market Systems

4. FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY ROLE OF SELF-INTEREST COMPETITION ACTIVE, BUT LIMITED, GOVERNMENT MARKETS & PRICES Characteristics of Market Systems

5. 1. Private Property – the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. Option create new products. 2. Freedom of Enterprise(business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. The consumer is “sovereign” (king) in the economy. His dollars vote as it is he who decides what gets produced. 3. Role of Self-Interest–each producer or consumer tries to do what is best for themselves. Self interest is the main force driving the economy. Producers aim for maximum profits. Consumers seek the lowest prices & highest quality.

6. Pure Capitalism and the Circular Flow 4. Competition – economic rivalry of a large number of buyers & sellers. Monopolies: (higher prices & fewer choices). Competition prevents one seller from controlling the market. Otherwise, monopolies can charge anarmand aleg.

7. 5. Markets & prices. Markets bring the buyers and sellers into contact. High pricessend signals to increase production and for other producers to enter the market. Low prices send signals to decrease production and for producers to exit the market. 6. Limited Government Intervention: in the economy. The role of government was one of “laissez faire.” [“hands off”]

8. 1 Hong Kong 3 New Zealand 6 United States 16 Chile 18 Canada 40 France 72 Malaysia 99 Pakistan 127 China 146 Iran 155 Cuba 156 North Korea GLOBAL PERSPECTIVE Index of Economic Freedom, Selected Nations Rankings among 156 nations, 2004 FREE MOSTLYFREE MOSTLYUNFREE REPRESSED Source: Heritage Foundation & The Wall Street Journal

9. Specialization of Labor Leads to an increase in wealth and productivity

10. Adam Smith’s famous Pin Factory Example • One man could do maybe 1 pin per day[1man = 1 pin] • Now if there is specialization • 1 man draws the wire out • 1 man straightens the wire • 1 man cuts the wire • 1 man sharpens the point • 1 man flattens the head There are 18 distinct operations - some perform 2 or 3 operations 10 people do 48,000 pins perday 1 man = 4,800 pins per day

11. “The Invisible Hand” Translated for you… • Individuals, acting in their own self interest, in a market economy, will together, as guided by an “invisible hand,” promote the public or social interest.

12. CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

13. The Circular-Flow Diagram Product Market 1 2 What flow are the following? A. Consumer expenditures? B. Goods and services? C. Land, labor, capital, and entrepreneurs? D. Rent, wages, interest, and profits? Businesses Households Labor 3 4 Resource Market