Understanding the Dynamics of Free Markets

1. Market systems

2. Market • Buyers and Sellers- voluntarily there, old days- physical site, today virtual (NASDAQ) Amazon.com, Craigslist.org • Interaction of the aggregate of buyers and the aggregate of sellers-> a market price • > shortage-> higher prices • >surpluses-> lower prices

3. Freedom of Enterprise/Work Choice • If incentives and interest arise (self-interest), individual(s) can enter into a business to produce a good or provide a service. • Individual(s) can enter into the labor market or the entrepeneurial market as they choose • Limited impediments to relocation, or starting a new business or closing down an existing one • In a market economy, economic profits or returns are the primary incentive

4. Consumer Soverienty Consumers decide what they want and make their $$$ votes at the market Consumers can use their $$ as they want- few, if any limits to what the buyer can choose to buy (rational self-interest) Sellers look to accommodate buyers- dependent upon their return to capital

5. Competition • Confluence of Sellers interested in making a return on capital and buyer’s acting in their own self-interest • Constant pressure on seller’s to come up w/new ideas or better methods of production • Specialization • Creative Destruction- Polaroid? Betamax? Blackberry? Mom and Pop stores?

6. Private Property, a Legal System • Property rights are clear and justiciable • Right to improve/change property • Right to sell, hypothecate (lien) property • Laws that ensure that future buyers and lien holders have an interest in the property • Efficient and Peaceful means to resolving claims w/minimal cost

7. Limited but Active Government • Ensures transparency and information that allows producers and consumers to understand the costs embedded in a product and consumers to reliably get the product they think they’re getting • Information- quick and efficient means of getting product information to the consumer and relaying sales information back to the producer • Regulation- ensures that private costs do not become social costs • Infrastructure- When social benefits of a good/service exceed private benefits, government facilitates a means to bringing the product/service to market. • Businesses and Consumers can expect a relatively stable government environment so that they can make short and long term plans

8. Monetary system • A reliable and stable medium of exchange • Divisible • Storer of Value • Transportable • No need for a double coincidence of wants • Liquid

9. Capital Accumulation • Private and Government system has an efficient method of pooling capital to reduce risk and amass funds • Few transactional costs • Corporate form provides limited liability and spread risk

10. Free Markets = Panacea? • Market Failure • When PMB doesn’t equal SMB or when PMC doesn’t equal SMC • Public and Quasi-Public Goods • Externalities • Perverse incentives? Rational self-interest Principle-Agent • Ensuring Competition • Regulating v. State ownership

11. PublicGoods • Can’t exclude people from using the product service? • My use of the product doesn’t interfere w/your use? • A little bit of the above plus lots and lots of social benefits? • French Fries versus Military Defense? • Park? School? Bridge? (Market Failure?)

12. Government to the Rescue? • SMB > PMB or SMC > PMC • Value SMB, SMC? Externalities • Creating Markets? Credits? Pollution Rights • Taxes, Subsidies, Quotas • Government assisted projects—Internet, Medicines • I can’t lose? Risk v. Reward and Moral Hazard • Ensuring competition- Anti-Trust Legislation