The Market System

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.

During the 20th Century…
 Life expectancy has gone from 47 to 77  Infant mortality plunged 93%  Diseases such as Polio, TB, Typhoid and Whooping cough have been wiped out.  The average household spends about 10 times as much on recreation as the average family did in 1900.  Women usually faced 70 hours a week of work in 1900. • … just inside the house

 In 1900 just 1 in 5 homes had running water,

During the 20th Century…

flush toilets, a vacuum cleaner, or gas and electric heat.  We now need our farmers to grow less food.  Most people in poverty today own a car, a color TV, a DVD Player, and a microwave, and consumer more calories than wealthy families.  Today, a $999 laptop contains more computing power than was available to all nations during WW II.  Illiteracy has fallen by 2/3’s in the US since 1900.  30 years ago, almost no homes had computers; Now over 60% do.
Source: It’s Getting Better All The Time: 100 Greatest Trends of the Last 100 Years by Steven Moore and Julian Simon, © 2000

”In the 20th Century, the US led in virtually everything. Growth, productivity and incomes, new products, and applying new ideas first or most effectively even if it did not invent them” -- From The Economist (a British magazine)

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

COMPETITION

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

COMPETITION

MARKETS & PRICES

ACTIVE, BUT LIMITED, GOVERNMENT

1. Private Property – the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. Gives the to 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 king dollars vote as it is he who decides what gets produced.
K-Mart?

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

Pure Capitalism (No G) and the Circular Flow
[Capitalism – “private ownership of capital”] 4. Competition – economic rivalry of a large number of buyers & sellers. [central mechanism of market economy] Monopolies become fat & unresponsive to consumers (higher prices & fewer choices). Competition prevents choices one seller from controlling the market.

And – an appendage to be named later, like a -

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

Monopolies can charge

an arm and a leg.

5. Markets & prices. Markets bring the buyers and sellers into contact. Prices send signals (Like HUGE NEON BILLBOARDS. High prices send signals to increase production and for other producers to enter the market. market Low prices send signals to decrease production and for producers to exit the market. market Nobel Prize winning economist Milton Friedman

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

Arbitrator

“Who Feeds Paris?”
• How does a restaurant in Paris have just the right amount of Tuna?
– Diners order more tuna (tuna becomes more popular in Paris) – Restaurants order more tuna, causing the wholesale price of tuna to go up – Fisherman in the Pacific Ocean will now get paid more for their tuna catch. – Many fisherman will start fishing for tuna instead of salmon. Some fisherman will switch to more expensive fishing methods justified by the higher price of tuna – These fisherman don’t care about the diners in Paris, only the wholesale price of tuna – Everyone acts in their own “self-interest.”

“Capitalism advantages the poor because, for the first time in history, it takes the dignity and the worth of individuals seriously and gives all people, especially the powerless and dispossessed, a sphere of action that is immune from the control of others.” -- Prof. P.J. Hill, Wheaton College Milton Friedman on Welfare, Communism

And finally – Would you drive a Communist Car?
Karl Marx was my Grandpa

YUGO
Only way to get up a hill
Which would begin to rust while still in the show room,

Would shake when it hit 35 mph, Would break in half going over RR tracks, And would never be stolen even if you left the keys in it with the motor running.

The Yugo on the inside or under the hood

Anytime you filled the Yugo with gas, you doubled its value. Putting seats in tripled its value.]

• By providing strong incentives for individuals to become entrepreneurs, capitalism encourages diligence, initiative, and hard work. • The spirit of enterprise requires effort to maintain; thus the incentive of profit rewards diligence and discourages slothfulness. • Regardless of his or her individual character, the entrepreneur motivated by profit will practice virtuous behaviors like diligence, initiative, and hard work because those behaviors are associated with successful enterprise.

Virtues of Markets

GLOBAL PERSPECTIVE
Rankings among 156 nations, 2004 FREE MOSTLY FREE MOSTLY UNFREE REPRESSED
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 Index of Economic Freedom, Selected Nations

Source: Heritage Foundation & The Wall Street Journal

[when bilateral trade is not beneficial]

Multilateral Trade

Crusoe
Has surplus fish Wants coconuts

Friday
Has surplus coconuts

Saturday
Has surplus bananas Wants fish

Wants bananas

52. Crusoe would get coconuts from (Friday/Saturday). 53. There (is/is no) coincidence of wants between any 2 states. 54. Money would flow (clockwise/counterclockwise). 55. The “coincidence of wants” problem means each transactor (must/must not) have a product which the other wants.

What was the Coolest document written in 1776?

Written by

He is my great, great, great, great, great, great grandpa on my mothers side…

What made The Wealth of Nations “THE” most important document written in 1776?
Adam Smith wrote about a pin factory.

Adam Smith: 1723 – 1790

When he first observed the factory, he noticed that each worker was producing his or her own pins. By the end of the day, the total production by the workers was 2,000 pins. He stated that each worker should specialize in the production stage rather than produce his or her own pins. Through specialization, the total output by the factory increased to

Leads to an increase in wealth and productivity

Adam Smith’s famous Pin Factory Example One man could do maybe 1 pin per day [1 man = 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 per day 1 man = 4,800 pins per day

“THE INVISIBLE HAND”

“… he intends only his own gain, and he is in this, as in many other cases, led by an

invisible hand to promote an end
which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

“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.

“The Invisible Hand”
Example: • A Entrepreneur starts a business to make a profit and earn a good living, but also gives people what they want. Both sides benefit. • A Doctor wants to earn a good salary and a living, and also helps people live longer. Both sides benefit.

Creative Destruction
…the creation of new products and more efficient production methods completely destroys the old way of doing business.

The Harley Hog Circular Flow
Resource Market

Product

Market

Hog CIRCULAR FLOW MODEL
RESOURCE MARKET

1 2

Mechanic
BUSINESSES

Flow 4. Goods/services Flow 3: Consumer expenditures

HOUSEHOLDS

3 4

PRODUCT MARKET

Hog CIRCULAR FLOW MODEL
1 2
Mechanic
BUSINESSES RESOURCE MARKET

Flow 4. Goods/services Flow 3: Consumer expenditures Flow 1: Land, Labor, Capital, Entrepreneur Flow 2: Rent, Wages, Interest, Profits
PRODUCT MARKET

HOUSEHOLDS

3 4

CIRCULAR FLOW MODEL
RESOURCE MARKET

BUSINESSES

Mechanic

HOUSEHOLDS

Businesses supply hogs g/s
I demand that hog & will pay.

PRODUCT MARKET

ouseholders demand hogs & will pay

CIRCULAR FLOW MODEL
Resource Market
RESOURCE MARKET

Mechanic

Householders

Businesses
BUSINESSES

Show me the money! & you’ll get this hog.

HOUSEHOLDS

GOODS & SERVICES $ REVENUE REVENU PRODUCT MARKET

GOODS & SERVICES
$CONSUMPTION

CIRCULAR FLOW MODEL
Resource Market
RESOURCE MARKET

Mechanic

I demanded this hog and had to pay for it.
Householders

Businesses
BUSINESSES

Show me the money! & you’ll get this hog.

HOUSEHOLDS

GOODS & SERVICES $ REVENUE REVENU PRODUCT MARKET

GOODS & SERVICES
$CONSUMPTION

CIRCULAR FLOW MODEL
Resource Market

HH supply hog labor

RESOURCE MARKET

Mechanic
H.D. demands hog labor & will pay

I demanded this hog and had to pay for it.
Householders

Businesses
BUSINESSES

Show me the money! & you’ll get this hog.

HOUSEHOLDS

GOODS & SERVICES $ REVENUE REVENU PRODUCT MARKET

GOODS & SERVICES
$CONSUMPTION

CIRCULAR FLOW MODEL
$ COSTS

Resource Market
$ INCOMES

BUSINESSES Give me your hog labor
show you the money.

& I’ll

HOUSEHOLDS

GOODS & GOODS & PRODUCT MARKET SERVICES SERVICES

CIRCULAR FLOW MODEL
$ COSTS

Resource Market
$ INCOMES

BUSINESSES

I supplied hog labor & was paid..

HOUSEHOLDS

GOODS & GOODS & PRODUCT MARKET SERVICES SERVICES

CIRCULAR FLOW MODEL
$ COSTS
RESOURCE MARKET

$ INCOMES

RESOURCES

INPUTS

BUSINESSES

HOUSEHOLDS

GOODS & SERVICES
PRODUCT MARKET

GOODS & SERVICES

$ REVENUE

$ CONSUMPTION

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

Households

Resource Market

NS 56-59

Fuzzy Wuzzy

56. In the product market (householders/businesses) are the demanders and (householders/businesses) are the suppliers. suppliers 57. In the resource market (householders/businesses) are the demanders and (householders/businesses) are the suppliers. suppliers 58. In the resource market, (householders/businesses) market sell resources to (householders/businesses). 59. In the product market, (householders/businesses) sell market products [goods/services] to (householders/businesses).

The End