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The Market System Profit and Competition Efficient Markets The Evolution of the Market System What do we want from an economy? Production – getting the most from scarce resources Exchange – minimizing transaction costs Social Cooperation: How does this happen? Kenyan coffee

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the market system

The Market System

Profit and Competition

efficient markets

Efficient Markets

The Evolution of the Market System

what do we want from an economy
What do we want from an economy?
  • Production – getting the most from scarce resources
  • Exchange – minimizing transaction costs

7 Market System

social cooperation how does this happen
Social Cooperation: How does this happen?
  • Kenyan coffee
  • Scottish sweater
  • Banana from El Salvador
  • Dishwasher assembled in Mexico
  • Thai restaurant
  • French movie
  • Stereo from Hong Kong

7 Market System

because of scarcity someone will always be told no
Because of scarcity, someone will always be told NO!
  • The trick is to get as much as possible from scarce resources.
  • What are the most efficient systems of production and exchange?

7 Market System

different methods of production and exchange
Different methods of production and exchange
  • Tradition -There is no need for success; you do what your parents did.
  • Command – You do as you’re told.
  • The market - You do what is in your best interests and by so doing, provide the material wants of society; incentives are the key.

7 Market System

necessary components of a market ciip

Necessary Components of a Market (CIIP)

Competition

Information

Incentives

Property Rights

andreas ryff germany 1550
Andreas Ryff - Germany, 1550
  • Customs toll every ten miles
  • Each community has its own:
    • money
    • rules and regulations
    • law
    • measures
  • Transaction costs are very high

7 Market System

robert keayne boston 1639
Robert Keayne - Boston, 1639
  • Crime - sixpence profit on a shilling, fined 200 pounds
  • False principles of trade
    • That a man might sell as dear as he can, and buy as cheap as he can. (Buy low; sell high.)
    • If a man lose, by casualty of sea, etc., in some of his commodities, he may raise the price of the rest.
    • That he may sell as he bought, though he paid too dear.
colbert france 1666
Colbert - France, 1666
  • Too much initiative - the reglement
    • Dijon and Selangey - 1,408 threads
    • Auxerre, Avalon, & 2 others - 1, 376 threads
    • Chatillon - 1,216 threads
  • If fabrics don’t conform, they will be pilloried; if found three times to be objectionable, the merchant is to be pilloried.

7 Market System

feudalism

FEUDALISM

No property rights, no productive resources, no innovation

slide14
LAND
  • Land was not real estate to be bought be bought or sold
  • Land formed the core of social life
  • Lord could not sell his land

7 Market System

human capital
HUMAN CAPITAL
  • No labor market
  • Peasant tied to Lord’s estate
  • Performed duties as a serf

7 Market System

financial capital
FINANCIAL CAPITAL
  • No risk, no change, safety first
  • Longest and most time consuming technique of production preferred
  • Producing product better than colleagues treasonable
  • Mass production and innovation forbidden

7 Market System

feudalism17
FEUDALISM
  • Production and exchange are inefficient
    • Market components (CIIP) don’t exist
    • Transaction costs are high

7 Market System

the soviet union
THE SOVIET UNION
  • Production and exchange were inefficient
    • Market components (CIIP) don’t exist
    • Transaction costs are high

7 Market System

will russia develop into a market system
Will Russia develop into a market system?
  • Competition – most industries run by monopolists
  • Information – difficult to obtain
  • Incentives – Russians not used to profit motive
  • Property rights – yes, for the few

7 Market System

what caused emergence of market system
What caused emergence of market system?
  • National political powers
    • royal patronage for industries
    • national laws, common measures, standard currencies
    • encouragement of foreign adventure
  • Decline of religious spirit, rise of humanism
    • Max Weber: Capitalism and the Protestant ethic

7 Market System

what caused emergence of market system21
What caused emergence of market system?
  • Material changes
    • towns
    • roads
  • Familiarization with money and markets
  • Double entry bookkeeping
  • Scientific curiosity and idea of invention
    • printing press, paper mill, mechanical clock, map, compass and other navigational tools, longitude

7 Market System

the plague 14 th century
The Plague – 14th century
  • One third of European population dies
  • Workers bargaining power increases
  • A labor market develops

7 Market System

what caused the market system to replace feudalism
What caused the market system to replace feudalism?
  • Emergence of market components (CIIP)
  • Reduction of transaction costs
slide24
1776

7 Market System

adam smith 1723 1790
ADAM SMITH(1723 - 1790)

Profit is the motivator, competition is the regulator.

7 Market System

profit is the motivator
Profit is the Motivator

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.”

7 Market System

competition is the regulator
Competition is the Regulator

“If he charges too much for his wares, or

if he refuses to pay as much as everybody

else for his workers, he will find himself

without buyers in the one case, and without workers in the other.”

7 Market System

the invisible hand self interest and competition
The Invisible Hand (self-interest and competition):
  • rewards efficient producers and buyers
  • results in:
    • goods society wants
    • quantity society wants
    • prices society is willing and able to pay
    • normal profits

7 Market System

the entrepreneur the driver of the market system
The Entrepreneur: the driver of the market system.
  • combines resources to produce a product
  • takes the risks associated with innovation
  • the “residual claimant”

7 Market System

why the market
Why the market?
  • Scarcity exists
  • Societies must find a way to allocate scarce goods and services
  • In any allocative mechanism, some people will be told “No.”
  • The market system is efficient, but…
  • Neither markets nor other economic systems are “fair.”

7 Market System

main points
Main Points
  • A market is an interaction of buyers and sellers.
  • Markets work with competition, information, incentives, and property rights (CIIP).
  • Feudalism had high transaction costs and none of the components of a market system.

7 Market System

main points32
Main Points
  • The market system developed as legal, social, political, and commercial institutions evolved.
  • Adam Smith’s An Enquiry into the Nature and Causes of the Wealth of Nations, published in 1776, described the market system.
  • According to Smith, the “Invisible Hand” is the combination of profit and competition that results in the efficient production and exchange of goods and services desired by society.

7 Market System

main points33
Main Points
  • In a market system, profit is the motivator and competition is the regulator.
  • The entrepreneur is the driver of the market system.
  • The market system is efficient; neither it, not other economic systems are “fair.”

7 Market System