Big one46 Slides

1
Chapter 2

• Big one46 Slides

2
Overview

• 3 individual sections
• First is about definition/explanation of market
  economy
• Second gives a few trends
• Third analyzes the role of govt in a market
  economy

3
Govt in Market Economy?

• We know a market, or capitalist, economy is one
  in which the individuals have the power
• How can we have govt in a market economy?
• Even though officially all economies today are
  MIXED, we still analyze them under the market and
  command categories
• Remember last class when we emphasized SIMPLE

4
So why govt needed?

• The market will take care of itself due to our
  own self-interest and the resulting invisible
  hand
• However, the market is still needed to provide
  the foundation for the economy, to provide things
  the market does not, and to protect us as
  consumers
• Difference comes from how much power the govt
  has (even consider Canada vs US)

5
If not govt, who controls?

• If the govt isnt responsible for controlling a
  market economy, then who does?
• Answer ALL OF US
• Each time you buy something you are controlling
  the economy
• Each time you sell something you are controlling
  the economy
• The economy revolves around billions of
  individual transactions that together combine to
  form a MARKET ECONOMY

6
We have the POWER

• As a consumer then every decision we make has a
  significant impact on the economy as a whole
• If we are willing to buy something we signal the
  producers to make it
• When we stop buying things we signal the
  producers to stop making it
• Think about the local businesses that have closed
  in the past few years
• Why did they?

7
Money is the key

• Our decisions to buy are based around the
  priceif we like the price we buy, if we dont we
  dont
• Successful markets combine the interaction of
  supply and demand to create a PRICE that can
  adjust to market conditions
• Have you ever seen a price change literally
  daily?
• Market signals sent by the consumers create those
  changes
• Even recently consider the iPhonewhy has the
  price already dropped 200?

8
Economy about 3 ?s

• We already discussed the idea that economies have
  to answer the 3 key questions What? How? For
  Whom?
• In a market economy, for the reasons already
  discussed, individuals have the power to answer
  those questions

9
Consumer Sovereignty

• Whats another word for sovereignty?
• Power
• Consumer sovereignty then becomes the same thing
  as consumer power
• In a market economy the consumers have the POWER
  to decide what is produced based on what we are
  willing to buy

10
They make what we buy

• When we buy stuff we do so in our own
  SELF-INTEREST to maximize our own personal
  UTILITY, or satisfaction
• When the producers turn around and make what we
  want to buy they are also looking out for their
  own self-interest by trying to maximize their
  PROFIT
• They then control the HOW question based on their
  desire to produce in the least costly way possible

11
For Whom?

• Our economy presently makes millions of different
  products all the timehow do we decide who should
  get each of them?
• Our economy tends to emphasize economic freedom
  over economic equity, and therefore, our
  willingness to pay the most for a product
  ultimately decides who will get it
• If 150,000 people all wanted to buy PSU/Notre
  Dame tickets for the game last weekend how did we
  decide who would actually get them?
• On eBay Craiglists they were selling for 500
  per ticket

12
Back Forth

• The exchange of money from consumer to producer
  and back again creates a CIRCULAR FLOW
• The 4 components are the FACTOR MARKET, PRODUCT
  MARKET, factors of production, and goods/services

13
(No Transcript)
14
Invisible Hand

• Millions of transactions take place everyday
  around this big circle
• All of them are based around doing what you feel
  is best for you
• We do not need govt intervention because we all
  ensure efficiency by not wasting what is our own
• Therefore, an invisible hand (all our own
  self-interests put together) regulates things
  just fine

15
Breather Break
16
Part 2 Modern Capitalism

• Enormous complex economies that exist today are
  possible due to 3 characteristics they all share
• 1. SPECIALIZATION
• 2. MONEY
• 3. CAPITAL

17
Get good at something

• As we specialize, we get good at something,
  regardless of what it is
• The better we get the more EFFICIENT we can
  produce, resulting in a greater output per input
  (productivity)
• All made possible by a DIVISION OF LABOR

18
Specialization Video
19
Back in the Day

• I am reminded of when I taught World Cultures a
  few years ago
• I will personally buy breakfast for anyone who
  can tell me the 3 requirements for having a
  civilization
• Ill even give you the firstdivision of labor
• What are the other two?

20
Lubricant of Exchange

• Our text refers to money as being the lubricant
  of exchange
• We no longer have to barter or trade for the
  things we desire which is in itself what allows
  such complex economies to exist
• Money allows us to buy/sell exactly what we want
  with ease as everyone willingly (and by law)
  accepts currency as a form of payment

21
Building Blocks

• Every year our economy produces over 13 trillion
  worth of goods services
• How can 300 million people, less than half of
  whom are in the workforce, produce that much?
• Answer BIG TRACTORS

22
www.deere.com
23
Capital Money

• Why spend 300,000 for a tractor when you can buy
  a bale of hay for about 1?
• How does that possibly make sense?
• Would you buy a tractor for that much money if
  you knew it wouldnt pay to do so?

24
More and More

• Look around our countryhow ridiculously much
  capital do we have?
• We have machines that cost 10,000 to cook a
  pizza, soda dispensers at McDonalds that cost
  2,000, and factories that cost hundreds of
  millions of dollars to equip
• I remember hitting my head on a 300,000 machine
  at Penn State

25
Both types the same idea

• It doesnt matter whether you are talking about
  human or physical capital, the same rule exists
• You pay out the whazoo to go to college and to
  buy fancy equipment because the end result is
  increased profit and production
• Capital allows us to produce more with less
• Sometimes it might mean consuming less now to buy
  more capital, but in the long run that itself
  will result in the PPF shifting to the right, one
  of our main goals

26
Breather
27
Market need Govt?

• Clearly in any capitalist economy the individuals
  will ultimately have the greatest control
• This includes businesses which are owned by
  people
• Essentially anything not the govt is considered
  an individual
• So why do we need the govt?

28
This Final Section is BIG

• This last little part here provides more content,
  and more important content, than the rest of the
  chapter
• Especially important are the 3 major roles the
  govt serves in a market economy

29
3 Major Roles

• 1. Increase efficiency
• 2. Promote equity
• 3. Stabilize business cycle

30
Start at the Back

• Keynes started macroeconomics during the Great
  Depression, emphasizing the role of govt in
  stabilizing the economy
• Since then have worked continually to balance
  UNEMPLOYMENT and INFLATION (Philips curve)
• There is no such thing as a perfect fix, instead
  just trying to guide the economy in the right
  direction

31
(No Transcript)
32
2 ways to control the Coaster

• Both Federal Government and the Federal Reserve
  (national bank) can influence the economy
• The Fed. Govt does so through FISCAL POLICY
  (control of taxes and spending)
• The Fed. Reserve does so through MONETARY POLICY
  (control of the money supply and interest rates)
• Will see in macro how critical it is that the two
  work together since have ability to offset what
  the other is trying to do

33
Share the Wealth

• Economic equity is not a major goal of our govt
• If it is how do you explain the new house going
  up on Stein Lane? How can we have homeless
  people living within 20 miles of a multi-million
  dollar mansion if we preach equity?
• The focus isnt on making sure we all have the
  same amount of money, but instead making sure we
  are all provided with the necessities of life

34
Keeping the Minimum

• We dont look for an average income, but a
  minimum
• Everyone is taxed and then part of the money is
  given to those who make less than is necessary to
  provide for family
• Similar protections if disabled or lose job

35
INCREASE EFFICIENCY

• Question--why do group projects ALWAYS fail?
  Raise your hand if you hate working in a group
  for major projects?
• Why?
• That in itself is a serious economic situation
  that validates the govts intervention
• Bottom Line--You should get what you
  deservenothing less, but also nothing more

36
Market Failures

• A market failure occurs whenever someone doesnt
  receive exactly what they deserve
• Sometimes this is bad, for instance someone
  pollutes on your land
• Others can be good, for instance your neighbor
  puts in a new pool
• It doesnt matter if it is good or bad, ALL SUCH
  SITUATIONS ARE STILL CONSIDERED MARKET FAILURES

37
3 Types

• 1. Imperfect Competition
• Perfect competitors have zero market power,
  meaning they cant affect the priceimperfect can
• If you can, then you raise it for your own
  benefit, meaning you make more than you should to
  maximize efficiency
• Producers should never make more than it takes to
  cover their costs, including a fair profit for
  the owners
• Ideal situation where P MC MB

38
Public Goods are Failures

• 2. Public goods are paid for from all of the
  taxpayers
• All have access but doesnt mean they use itif
  you use more than your share its a market
  failure and if you use less its a market failure
• Obviously we cannot get rid of public goods but
  we can try to make people pay for additional
  benefit gained

39
Dominos

• 3. Externalities--someones decision causes a
  cost/benefit for someone not involved in decision
  process
• You are effected by their choice
• Can be positive (creating benefits) or negative
  (imposing costs)
• Handled in opposite way

40
Good, Bad, the UGLY

• The positive, the negative, and the GRAPH
  APPLICATIONS
• Positive externalities are when you help someone
  else
• Govt doesnt care, they dont care, and you
  dont receive as much as you should
• Govt responds by offering payment or subsidy to
  you for doing so

41
Negative we dont like

• When someone imposes a cost on you we really tend
  to get upset
• A neighbor decides to burn dirty diapers
• Your sister decides to use you stuff
• Someone drinks all the water
• Whenever this happens the govt can correct it by
  taxing or fining those creating the negative
  externality

42
Easier to understand when see this concept in
action

• Think of it as being a supply and demand graph
• Mentally draw one
• The benefit you receive provides the demand for
  the product making BENEFIT the demand curve
• The cost of it provides the supply curve, under
  the label COST

43
(No Transcript)
44
Little things

• You may have noticed in the graph that they had
  Over and underallocation labeled
• If it is an negative externality you are imposing
  costs, which means the market itself will produce
  too much (overallocating resources) and to fix it
  they raise the price, which then reduces quantity
  purchased
• Reverse it for positive externalities

45
(No Transcript)
46
Review

• Characteristics of market economy
• Trends we see between them
• Role of the govt
• EXTERNALITIES
• This chapter hit us with a lot but it needed to
  to create foundation of SUPPLY DEMAND