The Market System

1
The Market System

• Profit and Competition

2
Efficient Markets

• The Evolution of the Market System

3
What do we want from an economy?

• Production getting the most from scarce
  resources
• Exchange minimizing transaction costs

4
Social Cooperation How does this happen?

• Kenyan coffee
• Scottish sweater
• Banana from El Salvador
• Dishwasher assembled in Mexico
• Thai restaurant
• French movie
• Stereo from Hong Kong

5
Because of scarcity, someone will always be told
NO!

• The trick is to get as much as possible from
  scarce resources.
• What are the most efficient systems of production
  and exchange?

6
Different methods of production and exchange

• Tradition -There is no need for success you do
  what your parents did.
• Command You do as youre told.
• The market - You do what is in your best
  interests and by so doing, provide the material
  wants of society incentives are the key.

7
Market An interaction of buyers and sellers
8
Necessary Components of a Market
(CIIP)

• Competition
• Information
• Incentives
• Property Rights

9
1776
10
ADAM SMITH(1723 - 1790)
Profit is the motivator, competition is the
regulator.
11
Profit is the Motivator

• It is not from the benevolence of the
  butcher, the brewer, or the baker that we expect
  our dinner, but from their regard to their
  self-interest. We address ourselves, not to their
  humanity, but to their self-love, and never talk
  to them of our necessities, but of their
  advantages.

12
Competition is the Regulator

• If he charges too much for his wares, or
• if he refuses to pay as much as everybody
• else for his workers, he will find himself
• without buyers in the one case, and without
  workers in the other.

13
The Invisible Hand (self-interest and
competition)

• rewards efficient producers and buyers
• results in
• goods society wants
• quantity society wants
• prices society is willing and able to pay
• normal profits

14
The Entrepreneur the driver of the market
system.

• combines resources to produce a product
• takes the risks associated with innovation
• the residual claimant

15
Why the market?

• Scarcity exists
• Societies must find a way to allocate scarce
  goods and services
• In any allocative mechanism, some people will be
  told No.
• The market system is efficient, but
• Neither markets nor other economic systems are
  fair.