Pure Capitalism and the Market System

1
Pure Capitalism and the Market System
Chapter 4
The Invisible Hand
2
The Model of Demand SupplyPrice Formation in
the Market System
Review
Price of Corn
5 4 3 2 1
CORN
CORN
1 2 3 4 5
80 55 35 20 10
1 2 3 4 5
5 20 35 50 60
10 20 30 40 50 60 70 80
Quantity of Corn
3
A case of Government Intervention Price Ceilings
5 4 3 2 1
10 20 30 40 50 60 70 80
4
A case of Government Intervention Price Ceilings
RENT CONTROL
5 4 3 2 1
Legal Price
10 20 30 40 50 60 70 80
5
A case of Government Intervention Price Floor
5 4 3 2 1
10 20 30 40 50 60 70 80
6
A case of Government Intervention Price Floors
MILK PRICE
5 4 3 2 1
Legal Price
10 20 30 40 50 60 70 80
7
Nine Foundations of Capitalism

• PRIVATE PROPERTY
• FREEDOM OF ENTERPRISE CHOICE
• ROLE OF SELF-INTEREST
• COMPETITION
• MARKETS PRICES
• AACTIVE BUT LIMITED GOVERNMENT
• EXTENSIVE USE OF CAPITAL GOODS
• SPECIALIZATION AND EFFICIENCY
• USE OF MONEY

8
The Market System at WorkFour Fundamental
Questions

• What output will be produced?
• - Economic Profit total revenue
  total cost
• - Normal Profit v/s Economic Profit
• - Profits and expanding industries
• - Losses and declining industries
• - Consumer sovereignty and Dollar
  Votes
• - Derived demand
• How will output be produced?
• - Economic efficiency and techniques of
  production

9
The Market System at WorkFour Fundamental
Questions

• 3. Who will get output?
• - Willingness and ability to pay
• 4. How will the system change?
• - Guiding function of prices
• - Capital accumulation

10
The Invisible hand
The Case for the Market System
1. Efficiency 2. Incentives 3. Freedom
11
private property freedom of enterprise freedom of
choice self-interest competition roundabout
production specialization division of
labor medium of exchange barter money
Five Fundamental Questions economic costs normal
profit economic profit expanding
industry declining industry consumer
sovereignty dollar votes derived demand guiding
function of prices invisible hand
12
Coming up next...
THE MIXED ECONOMY PRIVATE PUBLIC SECTORS
Chapter 5