6. Characteristics of Market Systems FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY ROLE OF SELF-INTEREST COMPETITION
7. Characteristics of Market Systems MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY ACTIVE, BUT LIMITED, GOVERNMENT ROLE OF SELF-INTEREST COMPETITION
8. 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. 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. 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 . K-Mart?
9. Pure Capitalism (No G) and the Circular Flow [Capitalism – “private ownership of capital”] Monopolies can charge an arm and a leg . And – an appendage to be named later, like a - 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 one seller from controlling the market. “ Competition” and “ self-interest” are like an “invisible hand”.
10. 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 . Low prices send signals to decrease production and for producers to exit the 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” ] 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 . Arbitrator [settling disputes]
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13. And finally – Would you drive a Communist Car? 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. YUGO Only way to get up a hill Karl Marx was my Grandpa
14. 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.]
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16. GLOBAL PERSPECTIVE Index of Economic Freedom, Selected Nations FREE MOSTLY FREE MOSTLY UNFREE REPRESSED Rankings among 156 nations, 2004 Source: Heritage Foundation & The Wall Street Journal 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
18. Saturday Has surplus bananas Wants fish Friday Has surplus coconuts Wants bananas Crusoe Has surplus fish Wants coconuts 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.
19. What was the Coolest document written in 1776? The Wealth of Nations Written by Adam Smith The Father of Economics He is my great, great, great, great, great, great grandpa on my mothers side…
20. What made The Wealth of Nations “THE” most important document written in 1776? Adam Smith wrote about a pin factory.
24. 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
32. Hog CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 Flow 4. Goods/services Flow 3: C onsumer expenditures Flow 1: L and, L abor, C apital, E ntrepreneur Flow 2: R ent, Wages, Interest, Profits
33. CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Householders demand hogs & will pay Mechanic RESOURCE MARKET Businesses supply hogs g/s I demand that hog & will pay.
34. BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENU E Resource Market Mechanic Businesses Show me the money! & you’ll get this hog. CIRCULAR FLOW MODEL Householders
35. BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENU E Resource Market Mechanic Householders Businesses I demanded this hog and had to pay for it. Show me the money! & you’ll get this hog. CIRCULAR FLOW MODEL
36. BUSINESSES HOUSEHOLDS RESOURCE MARKET PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENU E Resource Market Mechanic Householders HH supply hog labor H.D. demands hog labor & will pay Businesses Show me the money! & you’ll get this hog. I demanded this hog and had to pay for it. CIRCULAR FLOW MODEL
37. HOUSEHOLDS $ COSTS $ INCOMES GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET Resource Market BUSINESSES Give me your hog labor & I’ll show you the money. CIRCULAR FLOW MODEL
38. HOUSEHOLDS $ COSTS $ INCOMES GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET Resource Market BUSINESSES CIRCULAR FLOW MODEL I supplied hog labor & was paid..
40. The Circular-Flow Diagram Businesses Product Market Resource Market Households 1 2 3 4 Labor What flow are the following? A. Consumer expenditures? B. Goods and services? C. Land, labor, capital, and entrepreneurs? D. Rent, wages, interest, and profits? 2 1 4 3
41. NS 56-59 56. In the product market (householders/businesses) are the demanders and (householders/businesses) are the suppliers . 57. In the resource market (householders/businesses) are the demanders and (householders/businesses) are the suppliers . 58. In the resource market , (householders/businesses) sell resources to (householders/businesses). 59. In the product market , (householders/businesses) sell products [goods/services] to (householders/businesses). Fuzzy Wuzzy
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