1. Market Systems
Unit 3

2. Free Market System Less government involvement Private property
Profit incentive

3. Free Market Advantages
Responsive to consumer needs
Economic freedom
Competition
Faster growth

4. Free Market Disadvantages
Inequity of income distribution
Resources used on frivolous items
Externalities
Job insecurity

5. Role of Government in a Free Market System
Regulation
Public Goods

6. Command Market System More government involvement Communal property
Community rather than personal incentives

7. Command Market Advantages
Job security
All services taken care of
Big projects easier to do
Wealth more evenly distributed

8. Command Market Disadvantages
Non-responsive to consumer needs
Limited choices
Lines
Slower growth

9. Mixed Systems All economies are mixed systems
Economies that are more market based are called capitalist
Economies that are more command based are called communist
Economies in the middle are usually called socialist
Typical mixed systems have government control/ownership of basic services, while consumer goods rely on the market

10. Game Theory
The field of game theory came into being with the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. A major center for the development of game theory was RAND Corporation where it helped to define nuclear strategies
Made popular by John Nash’s “Prisoner’s Dilemma”, game theory has come to dominate economic and political thinking.
Game Theory studies choice of optimal behavior when costs and benefits of each option depend upon the choices of other individuals.

11. The Prisoners Dilemma
You and an accomplice have been arrested for a crime.You are interviewed separately by the police. You can choose to remain silent, and keep your agreement with your accomplice, or you can betray your accomplice by blaming them for everything.
Prisoner B Stays Silent
Prisoner B Betrays
Prisoner A Stays Silent
Each serves six months
Prisoner A serves ten years Prisoner B goes free
Prisoner A Betrays
Prisoner A goes free Prisoner B serves ten years
Each serves five years

12. Pirate Game
There are five rational pirates, A, B, C, D and E. They find 100 gold coins. They must decide how to distribute them
The Pirates have a strict order of seniority: A is superior to B, who is superior to C, who is superior to D, who is superior to E.
The Pirate world's rules of distribution are thus: that the most senior pirate should propose a distribution of coins. The pirates should then vote on whether to accept this distribution; the proposer is able to vote, and has the casting vote in the event of a tie. If the proposed allocation is approved by vote, it happens. If not, the proposer is thrown overboard on the pirate ship and dies, and the next most senior pirate makes a new proposal to begin the system again.
First of all, the pirates want to survive. Secondly, the pirates want to maximize the amount of gold coins they receive and, thirdly, they like throwing other pirates overboard.

13. Surprising to many, the end result is A: 98 coins B: 0 coins C: 1 coin D: 0 coins E: 1 coin