Chapter 4: Characteristics of the Market System

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Chapter 4 Characteristics of the Market System

• Content and visuals taken from McConnell/Brues
  Economics

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• CAPITALISM VS. SOCIALISM VIDEO

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Capitalism

• Capitalism was named for the ability of
  individuals to own the capitalor essentially
  control the economy
• Also known as free market, free enterprise,
  private enterprise, or market system

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We own it All

• Under capitalism the individuals, not the govt,
  own everything
• We own the resources, the factories, the
  technology, and most importantly our own
  intelligence and labor
• Since we own it we can benefit by working hard
  and conducting R/D to benefit ourselves

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Key Characteristics

• Freedom of Enterprisebuy/sell what you want
• Freedom of Choicedo what you want with your own
  stuff, including time
• Self-Interestwe always act in our own
  self-interest, but not always selfishly
• Competitionthe key to successforces both
  individuals and producers to elevate themselves
  to a higher level

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Competition

• As a rule, the more competition that exists the
  better the market will function and efficiency
  will be maximized
• Reduces individual MARKET POWER (ability to
  influence the price)
• Implies that there are few BARRIERS TO ENTRY
  (easy enter/exit from market)
• Forces compliance with the market equilibriumtoo
  much and wont do ittoo little and cant make it

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Traffic Light of Economy

• PRICES serve as the traffic lightthey tell
  producers when to go and when to stop when making
  products
• If a price is higher it signals demand that
  encourages more to make something
• If price is low it signals lack of demand that
  encourages other to leave
• Prices ultimately determine what a company will
  be making next based on their desire to produce
  what will provide the greatest profit

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www.deere.com
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Big tractors cost 175,000

• Who in their right mind would pay that much for a
  tractor? At best you can use it to bale hay
  which you can sell for 1 a bale
• The big combine in Son-in-Law with Pauly Shore
  costs 300,000 but grains sell for 20 a ton
• It doesnt matterthe key to CAPITAL, and buying
  capital, is that it enables you to produce at a
  cheaper costotherwise you wouldnt buy it

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Anything you can do I can do betterexcept think

• SPECIALIZATION is simply the ability to get good
  at something, anything
• What are you good at? Starting on the left share
  something you do well (not good Bock)
• Specialization allows for greater efficiency as
  it reduces the amount of time and resources
  needed to produce the same output
• Other times it makes us work with what we have
  availablecant grow grapes in Texas but can in
  New York

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• SPECIALIZATION ALWAYS MAKES US MORE EFFICIENT
• SPECIALIZATION ALWAYS REDUCES COSTS
• SPECIALIZATION ALWAYS INCREASES TOTAL OUTPUT
• THE MORE WE SPECIALIZE THE MORE VALUABLE OUR
  INDIVIDUAL EFFORTS BECOMETHINK ABOUT DOCTORS WHO
  ARE ALSO SPECIALISTSTHEY ALMOST GET PAID AS MUCH
  AS TEACHERS

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• SPECIALIZATION VIDEO

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How can you eat apples if you grow potatoes?

• TRADEin todays world BARTERING for everything
  would be impossible
• MONEY allows for us to buy things with the value
  our goods or services creates
• Historically, what has been used as money?
• Technically can be anything even though we use
  CURRENCY today
• By definition simple anything that acts as a
  MEDIUM OF EXCHANGE, STORE OF VALUE, AND UNIT OF
  ACCOUNT

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You control the economy

• How do you individually influence the economy?
• Since there is no supreme regulating force in our
  economy, it simply revolves around millions and
  billions of small, individual choices
• If you buy a pack of Smarties you are influencing
  the economy

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• All of these choices work towards the same
  unintentional goalregulating economic activity
• In the big picture though, every economy works to
  answer four questions
• What goods and services will be produced?
• How will they be produced?
• Who will get them when they are produced?
• How will the system accommodate change?

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We all do iteven China

• Every country in the world answers these
  questions
• Its the way they answer them or who has the
  power to answer them that dictates what type of
  economy you will have
• The US, Singapore, Canada, and Australia give the
  power to the people
• North Korea, Cuba, China, and the former Soviet
  Union choose/chose to keep the power in the hands
  of the govt
• Who wins in the end?

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What?

• What is simply answered by your willingness to
  buy something
• If you will buy it someone will make it
• However, producers also consider ECONOMIC COSTS
  AND ECONOMIC PROFITS in addition to NORMAL COSTS
  AND NORMAL PROFITS

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Whats the difference?

• An easy way to remember it is to think of the
  entire world as being normal with economists
  being the exception
• How would a normal person look at the following
  situation
• Joe likes to play video games. He goes to the
  store and buys a new game for 40. What did that
  game cost?

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Captain Obvious says 40

• For most people the instant response is simply
  40.
• That is true, but an economists is also going to
  consider the value of foregone goods as well.
• Therefore the economic cost might be larger than
  that of the normal cost
• The same thing goes for profit as well

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• By definition Profit is the revenue minus costs
• Normal Profit would include the total money
  brought in minus the total costs of production
• Economic Profit implies that there is more money
  earned after paying the bills than necessary to
  continue productionmore money was earned than in
  the next best alternative
• If you can make an economic profit you will
  encourage others to do the same thingwhich in
  the end reduces that profit to a normal level
  (Wow, this is good stuff!)

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Smith Reincarnate

• CONSUMER SOVEREIGNTY was first spoken of by Smith
  who explained that producers make what we want to
  buy, not what they want to sell
• Consumers, not the producers, control an economy
  based on their willingness to buyif you wont no
  one will make it
• Give some examples of things that are no longer
  made because we collectively stopped buying them

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We demand, they make

• Our demand therefore dictates what gets produced
• If we want it, they then want the resources they
  need to make it
• For example, our wanting to buy apple pie makes
  the producer want to buy apples and pie crusts
• Our demands for a product create the producers
  DERIVED DEMANDS for the inputs since they are
  needed to produce our goods

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How?

• This part is completely up to them
• I dont care how they make Chicken Nuggets, I
  just want them to be tasty
• The producer will decide the method of production
  based on their desire to minimize costsif they
  dunk the chickens in an electrified bath so be it
  just so its cheap

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Who?

• In our system, anyone willing and able to buy it
• If you save all your money for 6 years to buy a
  new Mercedes no one will stop you
• You want it, you buy it

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Accommodate Change?

• Has to do with the responsiveness markets have
  towards changing prices.
• Price is the traffic light that directs
  production and if we respond to it that implies
  accommodation to change
• If we stop buying pineapples, will the pineapple
  farmers cut down their trees?

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Also getting more with less

• All want to, but there are only two ways to
• 1. Technological Advance
• 2. Capital Accumulationalso called CAPITAL
  DEEPENING
• ABILITY TO ACCOMMODATE CHANGES IN THE ECONOMY AND
  MARKET DETERMINES YOU FUTURE SUCCESS
• CHANGE OR BE LEFT BEHIND

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Previous slight was a video depicting the power
of the invisible hand

• Again Smithno force needed

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• PRIVATE PROPERTY VIDEO

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3 MAIN STRENGTHS OF MARKETS

• 1. Efficiencyno one wants to waste what is
  theirs
• 2. Incentivespeople respond to incentivesif
  they will benefit or gain by doing something they
  will do it
• 3. Freedomgives a lot of freedommakes our
  system great

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Summary

• Understand/describe the basic principles and
  foundation of the market system
• 4 key questions about ECONOMIC SYSTEMS
• ECONOMISTS ARE NOT NORMAL
• Smith is more important than anyone