1 OUR ECONOMIC SYSTEM

2 Pure Capitalism Type of economic system generally characterized by: u Limited involvement of the government in the economy. u Individual ownership of the factors of production. u Individuals pursue their own self interest with few constraints.

3 What is an economic system ? All of the institutional means through which the FOP are used to satisfy wants. A representative democracy facilitates the institution of a capitalistic economy.

4 What is an economic system ? By institution we mean principally the laws of the nation and cultural practices which control the way in which individuals act. A law is something that serves to instruct.

5 What is an economic system ? There are six basic criteria associated with a pure capitalistic system: u The institution of private property u Free enterprise and free choice u Self interest u Competition and unrestricted markets u The market system u The limited role of government

6 The Institution of Private Property u Ownership of most property is held by individuals or groups of individuals (corporations, partnerships, etc.). u The state is not the owner of productive resources that are important forms of property.

7 The Institution of Private Property u Private property is controlled and enforced through the legal framework of laws, police, and courts. u Therefore one function of government is the protection of private property rights.

8 u Individuals are usually free to use their private property as they choose, so long as they do not infringe on the legal property rights of others. u Individuals are usually allowed to enter into private contractual agreements that are mutually satisfying. The Institution of Private Property

9 Free Enterprise and Free Choice (An Extension of Property Rights) u Exists when private individuals are allowed to obtain resources, to organize those resources, and to sell the resulting product in any way the individual chooses. u As long as their actions do not infringe on the property rights of others

10 Free Enterprise and Free Choice (An Extension of Property Rights) –Assumes there are no artificial restrictions that a government or other producer can put up to block a business's choice in the matter of purchasing its inputs and selling its outputs.

11 Free Enterprise and Free Choice (An Extension of Property Rights) –Assumes there are no artificial restrictions that a government or other producer can put up to block a business's choice in the matter of purchasing its inputs and selling its outputs.

12 Free Enterprise and Free Choice (An Extension of Property Rights) u Workers are free to enter any line of work for which they are qualified, and consumers can buy the desired basket of goods and services that they feel is best for them.

13 Free Enterprise and Free Choice (An Extension of Property Rights) u The ultimate voter is the consumer, he/she votes with dollars, and decides which product will survive –This reasoning is known as consumer sovereignty, where the ultimate purchaser of goods and services determines what is produced.

14 Free Enterprise and Free Choice (An Extension of Property Rights) u The ultimate voter is the consumer, he/she votes with dollars, and decides which product will survive –This reasoning is known as consumer sovereignty, where the ultimate purchaser of goods and services determines what is produced.

15 Self Interest Normally implies the maximization of profits or the minimization of losses. u Consumers: strive to maximize the amount of satisfaction possible from spending a given amount of money income. (as little as possible!)

16 Self Interest u Producers : strive to maximize the amount of net income possible from selling commodities at the highest possible price (get as much as possible!)

17 Self Interest u Consumers: strive to maximize the amount of satisfaction possible from spending a given amount of money income. (as little as possible!) u Producers : strive to maximize the amount of net income possible from selling commodities at the highest possible price (get as much as possible!)

18 Self Interest u Employees (Workers): strive to obtain the highest level of income possible for least amount of work. u Employers :strive to obtain the most amount of work from employees for the least cost.

19 Self Interest u Owners of resources: strive to obtain the highest possible price when that resource is sold or leased. u Users of resources: strive to obtain the lowest possible price for a resource so that THEY can make the most profit.

20 Competition and Unrestricted Markets u Competition is Rivalry among sellers who wish to attract customers and rivalry among buyers to obtain desired goods and services.

21 Competition and Unrestricted Markets u Competition requires a minimum of two conditions: –A relatively large number of independently acting sellers and buyers. –Freedom of sellers and buyers to enter or exit a particular industry without restrictions (unrestricted markets).

22 Competition and Unrestricted Markets u Economic competition imposes limits on the self interest of buyers and sellers. Competition is a regulating force in capitalist systems. –i.e. Raise prices Consumers go to another one of many sellers. –Economic profit earned New firms will enter the industry.

23 Unrestricted Markets –Economic profit earned New firms will enter the industry.

24 The Market System u An institution that develops from the –Private Property Rights –Free Choice and Free Enterprise –Self-Interest –Competition and Unrestricted Markets u Also referred to as the “Price System”

25 The Market System u Capitalism is a market economy. That is, buyers and sellers relate their opinions by expressing how much they are willing to pay for, or how much they demand of goods and services.

26 The Market System u Prices are used to signal the value of individual resources and commodities. Therefore, prices provide valuable information to consumers and producers. u Prices are the "guiding light" to which resource owners, businesses, and consumers follow when economic choices must be made.

27 The Market System u Therefore, we can say that the market system (price system) IS the organizing force in capitalist systems. –Organization is the coordination of individuals in the furtherance of a common goal.

28 The Market System u Resources tend to flow where they yield the highest rate of return or highest profit.

29 The Market System u Prices generate the signals for resource movements, provide information cheaply and quickly, and affect incentives. –i.e. The current movement of resources out of the farming sector and into the ornamentals, landscape and turf sectors.

30 Real Net Farm Income, N.C. (Millions $) Year

31 Ag. Institute Fall Enrollment

32

33 Percentage of Students Enrolled In Livestock Mgmt. & Tech

34 Percentage of Students Enrolled In Field Crops Technology

35 Percent of Students Enrolled in General Agricutlture

36 Percentage of Students Enrolled in Ornamentals & Landscape

37 Percentage of Students Enrolled in Turfgrass Management

38 Percentage of Students Enrolled in Traditional Agriculture Curr.

39 Percentage of Students Enrolled in Orn. & Land., and Turf

40

41 Average Starting Salaries, May 1992 and 1995 Graduates $20,400 $21,000 $22,183 $22,000

42 Average Starting Salaries of Ag. Inst. Graduates, 1993, 1994, 1995

43 Average Starting Salaries of Ag. Inst. Graduates, 1996, 1997, 1999

44 The Limited Role of Government u Someone or some entity has to define and enforce private property rights. –The government protects the rights of individuals and business persons to keep private property private, and keep the control of that property vested with the owners.

45 The Limited Role of Government u Reconcile Negative Externalities through Legislative Action or Civil Process to Settle Disputes Judicially

46 The Limited Role of Government u Eliminate monopolies that would restrain trade, u Issue money, u Prescribe a standard of weights measures,

47 The Limited Role of Government u Raise funds through taxation and other means (BORROW) for public goods such as national defense. u Therefore, government is essential to the existence of a pure capitalist economic system.

48 Public Goods COLLECTIVE CONSUMPTION: u Many people can consume the same units of a good or service simultaneously. u consumption of the good by one person does not diminish the amount available for anyone else.

49 Public Goods NON-EXCLUSION PRINCIPLE: u There is no technology available to prevent people who do not pay for the good or service from consuming it, OR the costs of exclusion are prohibitively high relative to the commodity's benefit.

50 Public Goods NON-EXCLUSION PRINCIPLE: u There is no technology available to prevent people who do not pay for the good or service from consuming it, OR the costs of exclusion are prohibitively high relative to the commodity's benefit.

51 Quasi-Public Goods u These are goods and services provided by government that could be exclusive. u In other words, these goods and services could be provided by the private sector rather than government u Examples: Education, fire and police protection, highways, etc.

52 Public Production vs. Public Provision u Public Production: –government actually produces public goods using government employees and other government owned resources –For example: DOT production of streets, roads, highways, and associated services

53 Public Production vs. Public Provision u Public Provision: –Government uses subsidies, contracts with private firms, and administrative regulations and codes to enhance production of public and quasi-public goods and services to a point deemed optimum. –For Example: the government does not produce aircraft carriers or submarines, the government contracts with private firms to produce these.

54 Privatization u Privatization: the shifting of actual government production of quasi-public goods to the private sector. –Volunteer fire departments in North Carolina often negotiate contracts with municipalities to provide fire protection. –Garbage collection has been contracted out –Prison management has been contracted

55 THE MIXED ECONOMIC SYSTEM Pure Capitalism is only one extreme type of social organization for the production and distribution of commodities. –The other extreme is a political system whereby the government, or a central decision making body, controls all productive resources. Alias: COMMUNISM

56 MIXED ECONOMIC SYSTEM u In reality, most economic systems are a combination of market and political systems.

57 MIXED ECONOMIC SYSTEM u In the US, we have a hybrid economic system. –Some decisions are made by the government directly. »Movement of resources has been strongly influenced by government through our tax system –Most decisions, however, are made in the market by businesses (producers) and consumers.

58 Economic Systems Market Economies Mixed Economies Command Economies Pure Capitalism Socialism Pure Marxist Communism Hong Kong Singapore United States Canada Japan W. Germany

59 Economic Systems Market Economies Mixed Economies Command Economies Pure Capitalism Socialism Pure Marxist Communism Great BritainCuba FranceNorth Korea Sweden China Former USSR

60 MIXED ECONOMIC SYSTEM u Therefore, our system is a mixed economic system that leans heavily towards pure capitalism.

61 MIXED ECONOMIC SYSTEM u After World War II, the role of the US government in our economic system expanded. –Government stepped in to help out (subsidize) certain industries and individuals.

62 MIXED ECONOMIC SYSTEM u loan guarantees to Lockheed and Chrysler, u protective tariffs on textiles, automobiles, beef, and peanut imports, u price support programs for many agricultural commodities,

63 MIXED ECONOMIC SYSTEM u expanded social welfare programs. Tax dollars are redistributed to those whom the government deems to be needy, u Social Security and Medicare Programs u Medicaid Program

64 MIXED ECONOMIC SYSTEM u and tax other industries and individuals. –windfall profit tax on the oil companies, (Carter Administration ) –luxury taxes on expensive boats and automobiles, (10% tax under Bush Administration, Democratic Congress) –repeal of capital gains exclusion in the tax code (Reagan Administration, Democratic Congress.).

65 MIXED ECONOMIC SYSTEM u Restrictions on the agricultural sector by means of quotas or allotments. –e.g. peanuts, tobacco, milk, and certain fruits u Restrictions on production and procurement of resources due to environmental concerns.

66 Government Intervention u Whether this government intervention is good or bad is a decision you must make. u Once you decide, you must voice your opinion at the voting booth. u To make objective decisions, you must have information. u This course is designed to provide information for the decision making you will have to undertake in the course of your career.

67 CONCLUSIONS u CAPITALISM: An economic system in which individuals privately own productive resources and possess the right to use these resources in what ever manner they choose subject to certain (minimal) legal restrictions.

68 CONCLUSIONS u A pure capitalist system works within the institution of private property that is controlled and enforced through the legal framework of laws, courts, and police.

69 CONCLUSIONS u It is a system of free enterprise, where producers freely choose the resources they use in the production process. u Consumers have freedom of choice also, as do workers and owners of resources in general.

70 CONCLUSIONS u Individuals and producers express their desires through the market system where u prices are signals about the relative scarcities of different goods, services, and resources.

71 CONCLUSIONS u The role of government is limited to the –protection of private property rights, –provide an environment favorable to competition, and –provide public goods.

72 CONCLUSIONS u Reconcile Negative Externalities through Legislative Action or Civil Process u Provide for national defense, u eliminate monopolies that would restrain trade, u issue money, u prescribe standards of weights measures, u raise funds by taxation and other means (BORROW) for public goods, and settling disputes judicially

73 Circular Flow Model BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE Copyright McGraw-Hill, Inc. 1999

74 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Copyright McGraw-Hill, Inc. 1999

75 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE NET TAXES FLOW TO GOVERNMENT FROM BUSINESSES GOVERNMENT Copyright McGraw-Hill, Inc. 1999

76 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT GOODS & SERVICES FLOW TO BUSINESSES GOVERNMENT Copyright McGraw-Hill, Inc. 1999

77 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE NET TAXES FLOW TO GOVERNMENT FROM HOUSEHOLDS GOVERNMENT Copyright McGraw-Hill, Inc. 1999

78 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOODS & SERVICES FLOW TO HOUSEHOLDS FROM GOVERNMENT GOVERNMENT Copyright McGraw-Hill, Inc. 1999

79 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE EXPENDITURES FLOW TO ACQUIRE RESOURCES GOVERNMENT Copyright McGraw-Hill, Inc. 1999

80 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT RESOURCES FLOW TO GOVERNMENT Copyright McGraw-Hill, Inc. 1999

81 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT GOVERNMENT EXPENDITURES FLOW TO PRODUCT MARKET Copyright McGraw-Hill, Inc. 1999

82 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT GOODS & SERVICES FLOW TO GOVERNMENT Copyright McGraw-Hill, Inc. 1999

83 THE CIRCULAR FLOW REVISITED BUSINESSES HOUSEHOLDS RESOURCEMARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT Copyright McGraw-Hill, Inc. 1999