The Market System

1. The Market System Other systemsCompetition Freedoms Private vs Public

2. 3 Basic Freedoms Capitalism Depends On • Private property- we are protected by our Constitution to own property. • Private enterprise- we can go into business if we desire. • Freedom of choice- jobs, school, businesses, production, consumption,

3. From 3 Freedoms- break intoFive Features of FE Economy Private Property – bank balances, dogs, houses, gardens, tools, earth’s minerals, Property represents Wealth Economic Freedom –(political freedoms) buy any good, start a business, use technology, invest, quit your job Economic Incentive –better life, work harder, go to school, receive rewards for work- punishments also Competitive markets –supply/demand/individual preferences.Exercise choice. Markets and prices*** key Limited Role of Government –2 roles (rule-maker, and umpire).Allows individuals equal opportunities

4. What is an economic system? • Economic system is more than simply a way to make a decision • It is a way of life. • Differs among societies and reflects a wide variety of values for individuals. • One value cannot prove superior to others as a general rule. Values are set in cultures and cultures set by economic system.

5. What is Capitalism? • Accumulation of factors of production • Productive labor (work for wages/become productive/produce more/ more accumulation of financial capital and capital) • Profits are the motivational factor to production and wages.

6. Question!!!!!! What are the 3 basic Economic Systems of the World?

7. Freedoms measured by economies COMMUNISM (Command) CAPITALISM SOCIALISM Most Reduced Quasi-Balanced Increased Least Freedom measured by degrees

8. What Changes our Capitalism into Socialism? Economic system mixed with government involvement/regulation • U.S. Postal Service • Amtrack • Medicare, Medicaid • AFDC • Social Security • Unemployment Compensation • FTC • EPA BRINGS US TO A MIXED CAPITALIST SYSTEM

9. Overview of Socialism • Began with utopia • Fueled by working conditions in factories, exploitation by capitalists • Search for a better quality of life for everyone • Level out disparities (income, living condition, property, possessions) • Government should make economic decisions in the market rather than the market making decisions. (i.e. re-distribution of wealth) • Masses closer to same throughout society. • Europe emphasis on change through elections.

10. Summary Socialism • State ownership of means for producing goods and services • Major industries often controlled by government. BBC… British Airlines…Coal Mines… Steel Mills. Venezuela today nationalizing industries. • Private ownership of secondary institutions. • Personal freedoms do exist- but to lesser degree than market economy. • Allocation of resources not efficient…massive government “bog-down” “featherbedding” etc. • Not a lean/mean economy…. Very heavy government. • United Kingdom closer to U.S. economy than France and Germany.

11. Command Economies • The opposite of Laissez Faire • Economic activity directed by government • These economies have been dismal failure (impossible to gather information about production and distribution to do efficient job of allocating resources.) Prices direct resources much better. • Usually characterized by dictatorship.

12. Summary Command • Relatively small amount of personal freedom-very restricted. • Lower standard of living for all except political leaders. • Only one political party runs government • Production and distribution of goods in hands of government • Change through revolution (often bloody-Russia, China) • Private business can exist- state controlled • Master plan of government is key to economic success.If plan fails, economy fails.

13. Decisions on Amount of Government • In a market economy, the people decide. • In a command economy, decision is made for the people- • Reminder- governments subsidize in all economies. More you subsidize something the more you get of it. • The key ingredient is amount of freedom that is available after type of economy is decided.

14. Competition is the circulatory system of a market economy • Monopoly’s not permitted…. Competition provides choice, better prices and quality of product. • Market rests on private ownership of property. • Who in the U.S. owns our factors of production? • Self-interest and personal rewards are key. • Technology innovation and capital formation has led to higher standard of living and per/capita income.

15. So how unusual it was for a new nation to actually want to self-rule and establish a market economy. HOW ON EARTH COULD THE CANDLES BE MADE, THE BREAD BAKED, THE BUSINESSES ESTABLISHED???? Invisible Hand concept – Mr. Adam Smith.

16. Adam Smith • Division of Labor • Specialization of Labor • Self-interest • Accumulation of capital • Private Property • Natural Law (using reason to analyze) • Invisible Hand

17. I know of no safe depository of the ultimate powers of society but the people themselves, and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion by education. Thomas Jefferson

18. The Public Sector:Government’s role. Questions to ponder: • What is Public Sector? • When do markets fail? • Should government step in?

19. Many believe that government provides the following. • Improved allocation of resources. (does it?) Only to the extent it permits free movement of g & s. • Medium of exchange • Product quality through regulations • Ownership rights defined- contract language • Enforcing contracts (courts, rule of law)

20. When the market fails… it is a double edge sword Market Fails if not optimal mix. * Optimal Mix of Output…… “Most desirable combination of output attainable with existing resources, technology and social values.” Market Failure *“An imperfection in the market mechanism that prevents optimal outcomes.”

21. In real words? Not enough public parks… Not enough care for environment… Not enough welfare… Too much separation between top 10% income earners and median income earners… Not adequate security within our borders…. Too many immigrants…. No health care for citizens

22. Market FailureIs this evident in today’s market? *market moves resources from one industry to another. (price directs resources) (demand responds) (price moves the resources then to another demand choice) (at this point (competition begins to prevail to level the prices) • Changes in market prices directs resources • Question…. Is this movement of resources what society really desires? (example SUVs)…If society does not want this market reallocation… should government intercede? Should govt tax heavily anyone who buys or drives an SUV?

23. Market failure = (forces of S & D not leading us to BEST point on ppc… Who decides what is defined as BEST? Enter…. Government intervention! Will they perform magic?

24. How do you know if optimal mix is met? Optimal mix of ANY GOOD or SERVICE = MB = MC (Marginal benefit = Marginal Cost) If cost greater than the benefit… the failure occurs. If benefit greater than the cost, then market is functioning according to other factors (price, demand, etc.) Does this apply to our war in Iraq? Bailing out the Big Banks?

25. Government Can Enter the Market to correct when market fails… Question………………. Does government improve the mix or make it • More complicated • Less efficient • More costly (now to taxpayers)

26. Governments Enter the Market to assure: 1. Public Goods 2. Externalities (positive or elimination of negative) 3. Market power 4. Equity

27. Translation If government and/or the consumer was not acting as a watchdog…. Would corporations be diligent about utilizing the proper mix of resources…If they are, can they compete? Does that always mean regulation increased? Could it mean that consumer sovereignty switches to another desire… BUT… what about things like energy… would we really know if the provider was efficient?

28. What is the tragedy of the commons? • Lake Michigan… who owns it? • No, resources owned in common • Do we maintain our houses.. Own property? • If we improve our property (paint, build-on) do we most often recoup when we sell? • No incentive for us to not pollute Lake Michigan. • Hence, natural resources are overused and degraded…(fish die, balance of nature upset)

29. Continued Concept of Common Assets • Resources, rivers, lakes, oceans, air… all fall into them absorbing pollution. • If manufacturers can dump wastes or discharge smoke without cost… they will do so. • Manufacturers will choose the least-cost combination of inputs and bear only unavoidable costs. • Many individuals avoid trash service if they can burn or dump their garbage.

30. No incentive for manufacturer to absorb internal costs for being good citizen • The contaminated water in W. VA • Fallacy of composition applies here… persons and firms reason their amount of environmental destruction is not significant in the total…

31. Two concepts to remember • Public goods… can be equally consumed by all… no restrictions Skateboarding in the park… Terrorists… can also go to the park… Illegal immigrants can go to school… • Private goods… consumption by one person excludes consumption by another.. ( my doughnut… my car… etc)

32. Four Broad Categories of Public Goods • Health and Hospitals Indigent have to be treated County medical centers Sometimes charged on ability to pay • Highways State and federal government share the cost • Education State, Local and Federal government provide • National Defense National government provides 5 branches of armed services Fed pays the entire cost!

33. Public Goods provided jointly to all would also include such things as: national defense monetary system judicial system

34. Opportunity cost… if government provides health care, private sector cannot compete. Government “crowds” out the private . **** Remember, the largest opportunity cost of an item supplied by government is the best alternative use that could have been made of the resources required to provide that good.

35. If government becomes too restrictive… Black Markets crop up. examples… cigarettes, drugs, bootleggers, diet supplements, prescription drugs, etc. • Government can and does play an important role in markets… Rule-maker Umpire What does that mean?

36. U.S. Concept of Freedom for All Joint consumption………. We all consume federal defense. (If hit by a terrorist attack in FL… the entire U.S. is protected. (even non-citizens… even those who attack us.) Why? They are “free riders.” People who pay most taxes actually contribute more for these services that we all enjoy. Many of us “ride free.”

37. Will America go full circle?