The Market The Market SystemSystem

Chapter 4Chapter 4

Market systems Market systems characteristicscharacteristics

Private individuals own most land and firmsPrivate individuals own most land and firms The feature cannot be overstated as private The feature cannot be overstated as private

property rights allows for the negotiation of property rights allows for the negotiation of contracts as well as freedom to use the land contracts as well as freedom to use the land for capitalist ventures. It also encourages for capitalist ventures. It also encourages innovation & growth.innovation & growth.

This also extends to intellectual property This also extends to intellectual property rights through patents, copyrights, and rights through patents, copyrights, and trademarkstrademarks

Freedom of ChoiceFreedom of Choice

Extends far beyond owing your own Extends far beyond owing your own land. Freedom to produce, freedom land. Freedom to produce, freedom to educate, freedom to utilize to educate, freedom to utilize available resources, freedom to sell available resources, freedom to sell in whatever markets are available.in whatever markets are available.

Applies to both employee & Applies to both employee & employeremployer

Consumers are free to choose how Consumers are free to choose how dollars are spentdollars are spent

Self–Interest (Greed)Self–Interest (Greed)

Self-Interest drives the markets. We Self-Interest drives the markets. We try to maximize profit and minimize try to maximize profit and minimize loss. We attempt to utilize resources loss. We attempt to utilize resources while at the same time hoping not to while at the same time hoping not to waste them.waste them.

The economy grows as more try to The economy grows as more try to reach the level satisfaction reach the level satisfaction necessary for a thriving market. necessary for a thriving market.

CompetitionCompetition

The “controlling mechanism” of the The “controlling mechanism” of the marketsmarkets

Large number of sellers means that no Large number of sellers means that no single firm can control the price of a single firm can control the price of a particular productparticular product

Large numbers of buyers means that no Large numbers of buyers means that no single consumer can control price or single consumer can control price or market demandmarket demand

Easy entry into and out of markets is Easy entry into and out of markets is fundamental fundamental

Markets & PricesMarkets & Prices

Illustrates the decisions of buyers Illustrates the decisions of buyers and sellers in a factor and product and sellers in a factor and product marketmarket

Change in price = change in marketChange in price = change in market Responding to market signals Responding to market signals

translates to success or failure translates to success or failure depending on timingdepending on timing

Reliance on TechnologyReliance on Technology

Competition, Freedom of choice, Competition, Freedom of choice, Profit all provide the incentive for Profit all provide the incentive for accumulation of capital equipment accumulation of capital equipment (investment)(investment)

Roundabout method of technology – Roundabout method of technology – the use of capital goods to satisfy the use of capital goods to satisfy wants indirectlywants indirectly

SpecializationSpecialization

Division of Labor allows workers to Division of Labor allows workers to specialize in specific tasks.specialize in specific tasks.

Geographic Specialization takes Geographic Specialization takes advantage of local resourcesadvantage of local resources

Money as a Medium of Money as a Medium of ExchangeExchange

Allows for multiple transactions and Allows for multiple transactions and solves the issues that would be solves the issues that would be associated with a barter system. associated with a barter system.

Uniformly accepted by all businesses Uniformly accepted by all businesses as well as all nations in some form or as well as all nations in some form or fashionfashion

Exchange Markets provide way for Exchange Markets provide way for all countries to interact monetarily all countries to interact monetarily

Active, but limited Active, but limited governmentgovernment

Market shortcomings must be Market shortcomings must be regulatedregulated

The U.S. Government regulates The U.S. Government regulates trade, promotes competition, and trade, promotes competition, and assists in providing consumers with assists in providing consumers with safe and fair alternativessafe and fair alternatives

4 Basic Economic 4 Basic Economic Questions Questions

What to Produce?What to Produce? How to Produce?How to Produce? For whom to Produce?For whom to Produce? How to accommodate Change?How to accommodate Change?

ProfitsProfits

Accounting Profits = Total Revenue Accounting Profits = Total Revenue – Total Accounting Costs– Total Accounting Costs

Normal Profits = The cost of doing Normal Profits = The cost of doing business, the break-even pointbusiness, the break-even point

Economic or Pure Profit = Economic or Pure Profit = Everything over and above normal Everything over and above normal profitsprofits

Consumer SovereigntyConsumer Sovereignty

Consumers dictate production Consumers dictate production through choices or “dollar votes”through choices or “dollar votes”

Businesses do not have freedom to Businesses do not have freedom to produce outside of what the market produce outside of what the market demandsdemands

Demand drives Supply, and Demand drives Supply, and resources are valued based on their resources are valued based on their importance in creating products importance in creating products people want – Derived Demandpeople want – Derived Demand

ConclusionConclusion

Technology and innovation become Technology and innovation become goals because they increase profits. A goals because they increase profits. A process known as “creative destruction” process known as “creative destruction” takes place when old technology is takes place when old technology is destroyed in favor of something more destroyed in favor of something more efficient.efficient.

Adam Smith’s “Invisible Hand” – The Adam Smith’s “Invisible Hand” – The driving force in the economy, our own driving force in the economy, our own self interest, the attempt to maximize self interest, the attempt to maximize profitsprofits