1. Pillars of a free market system
Remember: free enterprise, free market and capitalism are used interchangeably in this class!!!
Pillars of a free market system
Chapter 3 section 1

2. Perverse incentives
In their book, meltdown – inside the soviet economy, authors Paul Craig Roberts and Karen Lafollette report on the seemingly mysterious propensity of soviet geologists for drilling many shallow holes rather than a smaller number of deep holes. Since most of the oil deposits lie at relatively deep levels, it is not too surprising that “…soviet geological expeditions in the republic of Kazakhstan have not discovered a valuable oil deposit for many years…. The surprising fact is that they were “…considered successful …. the geologists and ministers are paid handsomely for their efforts, everyone goes out and gets drunk, and no one cares that the whole exercise has been an extraordinary waste of time and money.” What incentive system explains their actions?
Clues
In the process of oil-well drilling, the deeper the hole, the slower the drilling progress.
The soviet geologists were paid if they reached their quota and received bonuses if they exceeded it.

3. North Korea versus south Korea
From Korean War to mid-1970s, North Korea and South Korea had a similar GDP per capita
Umm, what’s GDP per capita? Add up all of the goods and services produced in one country in one year and divide it by the number of people.
Today
per capita GDP in North Korea is $1,800
per capita GDP in South Korea is $31,900

4. North Korea versus south Korea
February 2014

5. North Korea versus south Korea
February 2014

6. What do these images tell you about north korea?
February 2014

7. What accounts for the difference between north and south korea?
Incentives matter!
Working for the good of society vs working for your own self interest

8. Features of a free market system
Private property
Economic incentives
Freedom to choose
Voluntary exchange
Competition
EOC study guide
Basic Economic Concepts #12

9. 1. Private property
Private property is any good that is owned by an individual or a business
Individuals may own as much property as they are willing and able to buy
Owners may prohibit others from using their property
Franz Guest/Jim Belushi/Martha’s Vineyard
Public property is any good that is owned by the government

10. 2. Economic incentives
A free enterprise system is driven by the desire for profit
Money acts as an incentive to produce
Produce goods and produce labor
Profit is a powerful incentive that leads entrepreneurs and businesses to accept the risk of business failure

11. 3. Freedom to choose
Workers can choose what work to do and for whom they will work
Businesses can choose The people they want to work for them

12. 3 ½ . Freedom to choose Cont.
Businesses can choose the products they will produce and how much they want to sell them for
Buyers can choose the products they buy

13. Basic Economic Concepts #9
4. Voluntary exchange
Basic Economic Concepts #9
EOC study guide
Voluntary exchange is The free exchange of goods and services between buyers and seller in some sort of marketplace.
Businesses and Individuals have the right to make exchanges or trades they believe will make them better off
Guy trades a paperclip for a house

14. 5. Competition
Individuals are free to open businesses that compete with others
Consumers benefit from competition
Competition improves quality and lowers prices
Competition between employers for workers raises wages