Introduction to Markets & Capitalism

The Market MechanismA system of prices and markets that

coordinates the economic activity of a society

A market exists anywhere a buyer and a seller for a good or service are in contact with one another

Markets & Prices:the ORGANIZING force

Prices serve as SIGNALSSIGNALS

in a market economy

Dual Functions of Prices:

Rationing function vs Guiding functionThose who are Resources arewilling to pay the ‘guided’ to producersMarket price get whose goods are inthe good high demand

Expanding IndustriesAn example………...remember the

Furby phenomena?

D --P --Pr --Re --SDemand Price Profit Resources Supply

New Firms entermarket

Declining IndustriesRemember typewriters?

D P Pr Re S

Firms exit the market

Institutions &

Assumptions

of Capitalism

PRIVATE PROPERTY

Individuals:are free to enter into legal contracts

may own and profit from property resources

may bequeath property/financial wealth

FREEDOM OF ENTERPRISE & CHOICE Private business obtains and organizes the

factors of production to produce WHAT, and HOW they choose

Owners of property resources use them as they see fit

Laborers are free to enter the labor market of choice

Consumers may buy whatever they can afford

SELF INTEREST: the motivating force

Every economic actor attempts to do what is best for him/herself

GOAL: Welfare maximization

COMPETITION: the regulatory force

Competition = economic rivalry

Presence of large number of independent buyers and sellers in any given market means no one individual has the ability to affect price through his/her actions

IN other words….the MARKET determines the price not the individual

LIMITED GOVERNMENT

LAISSEZ-FAIRE CAPITALISMCapitalism seen as a self-regulating/self-

adjusting system

The market takes care of itself and is always headed towards:

EQUILIBRIUM

THE INVISIBLE HANDAdam Smith’s most famous theory:

With each individual pursuing his/her own self-interest, the general or societal interest is promoted even though it was no ones intention…..

Government’s Role: Pure Capitalism

Provide Public Goods

Establish and maintain a legal framework for enterprise

Encourage competition

Government’s Role: Modified Capitalism

Redistribution of income (Equity)

Correcting market failures (Efficiency)

Macroeconomic Stability (Stability)

Modern

Economies:

shared traits

CAPITAL GOODSFocus on innovation in production

Direct vs roundabout production

“there’s a better way to get water out of a well than to jump in after it”

Producing capital goods that willAid in the production of

final good

SPECIALIZATIONdefined….labor, within the economy,

performs specific jobs

ie: doctor, teacher, brick layer, etc…..

=interdependence

DIVISION OF LABORdefined…further specialization; breaking a

specific job into discreet tasks performed by different individuals

ie: physical exam=secretary, nurse, doctor, lab technician :car assembly=assembly line production

MONEYFunctions of money:

Medium of exchange

Standard of value

Store of value

Thank you for your attention