The Market SystemThe 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

During the 20th Century… In 1900 just 1 in 5 homes had running water,

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 SystemsCharacteristics of Market Systems

FREEDOM OFFREEDOM OFENTERPRISEENTERPRISE

& CHOICE& CHOICE

PRIVATEPRIVATEPROPERTYPROPERTY

ROLE OFROLE OFSELF-INTERESTSELF-INTEREST COMPETITIONCOMPETITION

MARKETSMARKETS& PRICES& PRICES

FREEDOM OFENTERPRISE

& CHOICE

PRIVATEPRIVATEPROPERTYPROPERTY

ACTIVE, BUTACTIVE, BUTLIMITED,LIMITED,

GOVERNMENTGOVERNMENT

ROLE OFROLE OFSELF-INTERESTSELF-INTEREST COMPETITIONCOMPETITION

Characteristics of Market SystemsCharacteristics of Market Systems

2. Freedom of EnterpriseFreedom of Enterprise (business) & Choice(business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. The consumer is “sovereign”consumer is “sovereign” (kingking) in the economy. His dollars vote as it is he who decides what gets produced.

1. Private PropertyPrivate 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-InterestRole of Self-Interest–each producer or consumer tries to do what is best for themselvesbest for themselves. Self interest is the main force driving the economy. ProducersProducers aim for maximum profitsmaximum profits. ConsumersConsumers seek the lowest prices & highest qualitylowest prices & highest quality.

K-Mart?K-Mart?

Pure Capitalism Pure Capitalism (No G)(No G) and the Circular Flow and the Circular Flow[Capitalism – “private ownership of capital”][Capitalism – “private ownership of capital”]

Monopolies can charge

an arm and a leg.

And – an appendageto be named later,like a -

4. CompetitionCompetition – economic rivalry of a large number ofbuyers & sellers. [central mechanism of market economy]Monopolies become fat & unresponsive Monopolies become fat & unresponsive to consumers(higher prices & fewer choiceshigher prices & fewer choices). Competition preventsone seller from controlling the market.

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

5. MarketsMarkets & & pricesprices. Markets bring the buyers and sellers into contact.

Prices send signals (Like HUGE NEON BILLBOARDS. High pricesHigh prices sendsignals to increase production increase production and for other producers to enter the marketenter the market.

Low pricesLow prices send signals to decrease productiondecrease production and for producers to exit the marketexit the market. Nobel Prize winning economist Milton Friedman

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

ArbitratorArbitrator[settling disputes][settling disputes]

“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? 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 thekeys in it with the motor running.

YUGOYUGOOnly way to get up a hillOnly way to get up a hill

Karl Marx was my Grandpa

The The YugoYugo on the inside or under the hood on the inside or under the hood

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

Virtues of Markets• 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.

GLOBAL PERSPECTIVEGLOBAL PERSPECTIVEIndex of Economic Freedom, Selected NationsIndex of Economic Freedom, Selected Nations

1 Hong Kong3 New Zealand6 United States

16 Chile18 Canada40 France

72 Malaysia99 Pakistan127 China146 Iran155 Cuba

156 North Korea

FREEFREE

MOSTLYMOSTLYFREEFREE

MOSTLYMOSTLYUNFREEUNFREE

REPRESSEDREPRESSED

Rankings among 156 nations, 2004

Source: Heritage Foundation & The Wall Street Journal

Multilateral TradeMultilateral Trade[when bilateral trade is not beneficial][when bilateral trade is not beneficial]

SaturdaySaturdayHas surplus bananasHas surplus bananas

Wants fishWants fish

FridayFridayHas surplus coconutsHas surplus coconuts

Wants bananasWants bananas

CrusoeCrusoeHas surplus fishHas surplus fishWants coconutsWants coconuts

52. Crusoe would get coconutsCrusoe would get coconuts from (Friday/Saturday).53. There (is/is no) coincidence of wantscoincidence of wants between any 2 states.54. Money would flowMoney would flow (clockwise/counterclockwise).55. The “coincidence of wants”“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 48,000 pins per day.

Leads to an increase in wealth and productivity

Adam Smith’s famous Pin Factory ExampleAdam Smith’s famous Pin Factory Example

One man could do maybe 1 pin per day [1 man = 1 pin][1 man = 1 pin]Now if there is Now if there is specializationspecialization1 man draws the wire out1 man straightens the wire1 man cuts the wire1 man sharpens the point1 man flattens the head

There are 18 distinct operations - some perform 2 or 3 operations10 people do 48,000 pins per day1 man = 4,800 pins per day1 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 The Harley HogHarley Hog Circular Flow Circular Flow

Product MarketProduct Market

Resource MarketResource Market

Hog Hog CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

PRODUCT MARKETPRODUCT MARKET

Mechanic

RESOURCE MARKETRESOURCE MARKET11

22

33

44

Flow 4. Goods/servicesFlow 4. Goods/servicesFlow 3: CFlow 3: Consumer expendituresonsumer expenditures

HogHog CIRCULAR FLOW CIRCULAR FLOW MODELMODEL

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

PRODUCT MARKETPRODUCT MARKET

Mechanic

RESOURCE MARKETRESOURCE MARKET11

22

33

44

Flow 4. Goods/servicesFlow 4. Goods/servicesFlow 3: CFlow 3: Consumer expendituresonsumer expenditures

Flow 1: Flow 1: LLand,and, L Labor, abor, CCapital, apital, EEntrepreneurntrepreneur

Flow 2: Flow 2: RRent, Wages, Interest, Profitsent, Wages, Interest, Profits

CIRCULAR FLOW CIRCULAR FLOW MODELMODEL

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

PRODUCT MARKETPRODUCT MARKET

Householders demand hogs & will pay

Mechanic

RESOURCE MARKETRESOURCE MARKET

Businesses supply hogs g/s

I demand that hog & will pay.

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTPRODUCTMARKETMARKET

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

$CONSUMPTIONCONSUMPTION$ REVENUREVENUE

Resource Market

Mechanic

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

CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

Householders

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTPRODUCTMARKETMARKET

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

$CONSUMPTIONCONSUMPTION$ REVENUREVENUE

Resource Market

Mechanic

HouseholdersBusinesses

I demanded this hog and had to pay for it.

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

CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

BUSINESSES HOUSEHOLDS

RESOURCEMARKET

PRODUCTPRODUCTMARKETMARKET

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

$CONSUMPTIONCONSUMPTION$ REVENUREVENUE

Resource Market

Mechanic

Householders

HH HH supply hog laborsupply hog labor

H.D. demands hog labor & will pay

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

I demanded this hog and had to pay for it.

CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

HOUSEHOLDSHOUSEHOLDS

$ COSTSCOSTS $ INCOMESINCOMES

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICESPRODUCT MARKETPRODUCT MARKET

ResourceResource Market Market

BUSINESSESBUSINESSES Give me Give me your your hog labor hog labor & & I’ll I’ll show you the money.show you the money.

CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

HOUSEHOLDSHOUSEHOLDS

$ COSTSCOSTS $ INCOMESINCOMES

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICESPRODUCT MARKETPRODUCT MARKET

ResourceResource Market Market

BUSINESSESBUSINESSES

CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

I supplied hog labor & was paid..

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

RESOURCEMARKET

RESOURCESRESOURCES INPUTSINPUTS

$ COSTS$ COSTS $ INCOMES$ INCOMES

PRODUCTMARKET

GOODS &GOODS &SERVICESSERVICES

GOODS &GOODS &SERVICESSERVICES

$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE

CIRCULAR FLOW MODELCIRCULAR FLOW MODEL

The Circular-Flow DiagramThe Circular-Flow Diagram

BusinessesBusinesses

Product MarketProduct Market

Resource MarketResource Market

HouseholdsHouseholds

11

22

33

44

LaborLabor

BusinessesBusinessesBusinesses

What flow are the following?What flow are the following?A. Consumer expenditures?A. Consumer expenditures?B. Goods and services?B. Goods and services?C. Land, labor, capital, C. Land, labor, capital, and entrepreneurs?and entrepreneurs?D. Rent, wages, interest, D. Rent, wages, interest, and profits?and profits?

221144

33

NS 56-59NS 56-59

56. In the product marketproduct market (householders/businesses) are the demandersdemanders and (householders/businesses) are the supplierssuppliers.57. In the resource marketresource market (householders/businesses) are the demandersdemanders and (householders/businesses) are the supplierssuppliers.58. In the resource marketresource market, (householders/businesses) sell resourcessell resources to (householders/businesses).59. In the product marketproduct market, (householders/businesses) sellsell productsproducts [goods/services] to (householders/businesses).

Fuzzy WuzzyFuzzy Wuzzy

The EndThe End