Introduction to Markets & Capitalism. The Market Mechanism A system of prices and markets that coordinates the economic activity of a society A market.

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Presentation transcript:

Introduction to Markets & Capitalism

The Market Mechanism A 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

Expanding Industries An example………...remember the Furby phenomena ? D --P --Pr --Re --S Demand Price Profit Resources Supply New Firms enter market

Declining Industries Remember 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 CAPITALISM Capitalism seen as a self-regulating/self- adjusting system The market takes care of itself and is always headed towards: EQUILIBRIUM

THE INVISIBLE HAND Adam 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 ( E quity)  Correcting market failures ( E fficiency)  Macroeconomic Stability ( S tability)

Modern Economies: shared traits

CAPITAL GOODS  Focus 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 will Aid in the production of final good

SPECIALIZATION defined….labor, within the economy, performs specific jobs ie: doctor, teacher, brick layer, etc….. =interdependence

DIVISION OF LABOR defined…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

MONEY Functions of money:  Medium of exchange  Standard of value  Store of value

Thank you for your attention

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