4 C H A P T E R The Market System

CAPITALIST IDEOLOGY PRIVATE PROPERTY COMPETITION ROLE OF SELF-INTEREST FREEDOM OF ENTERPRISE & CHOICE ROLE OF SELF-INTEREST COMPETITION

CAPITALIST IDEOLOGY LARGE NUMBERS ENTRY & EXIT PRIVATE PROPERTY FREEDOM OF ENTERPRISE & CHOICE LARGE NUMBERS ROLE OF SELF-INTEREST ENTRY & EXIT COMPETITION

CAPITALIST IDEOLOGY PRIVATE PROPERTY MARKETS & PRICES COMPETITION FREEDOM OF ENTERPRISE & CHOICE ROLE OF SELF-INTEREST COMPETITION MARKETS & PRICES ACTIVE, BUT LIMITED, GOVERNMENT

GLOBAL PERSPECTIVE Rankings among 156 nations, 2000 Index of Economic Freedom, Selected Nations Rankings among 156 nations, 2000 1 Hong Kong 4 New Zealand 5 United States FREE 13 Chile 14 Canada 20 Germany MOSTLY FREE 75 Malaysia 93 Brazil 106 Poland MOSTLY UNFREE 144 Vietnam 151 Iran 152 Cuba REPRESSED Source: Heritage Foundation & The Wall Street Journal

Reliance on Technology CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Roundabout Production

Reliance on Technology Specialization and Efficiency CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Specialization and Efficiency

Reliance on Technology Specialization and Efficiency CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Specialization and Efficiency Differences in Ability Fosters Learning by Doing Saves Time

Reliance on Technology Specialization and Efficiency CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Specialization and Efficiency Division of Labor

Reliance on Technology Specialization and Efficiency CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Specialization and Efficiency Geographic Specialization

Reliance on Technology CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Specialization and Efficiency Use of Money As a Medium of Exchange

Reliance on Technology Specialization and Efficiency CAPITALIST IDEOLOGY Other Characteristics Reliance on Technology and Capital Goods Specialization and Efficiency Use of Money Barter System Difficulties

The Four Fundamental Questions... THE MARKET SYSTEM AT WORK The Four Fundamental Questions... What will be produced?

The Four Fundamental Questions... THE MARKET SYSTEM AT WORK The Four Fundamental Questions... How will the goods be produced? What will be produced?

The Four Fundamental Questions... THE MARKET SYSTEM AT WORK The Four Fundamental Questions... What will be produced? How will the goods be produced? Who will get the goods and services?

The Four Fundamental Questions... THE MARKET SYSTEM AT WORK The Four Fundamental Questions... What will be produced? How will the goods be produced? Who will get the goods and services? How will the system accommodate change?

Economic or Pure Profit Normal Profit Expanding Industry WHAT WILL BE PRODUCED? Economic Profit = Total Revenue – Total Cost Economic or Pure Profit Normal Profit Expanding Industry Declining Industry Consumer Sovereignty

Economic or Pure Profit Normal Profit Expanding Industry WHAT WILL BE PRODUCED? Economic Profit = Total Revenue – Total Cost Economic or Pure Profit Normal Profit Expanding Industry Declining Industry Consumer Sovereignty Dollar Votes Market Restraints on Freedom Derived Demand

Least Cost Production Available Technology Economic Efficiency HOW WILL THE GOODS AND SERVICES BE PRODUCED? Least Cost Production Resource Prices Resource Productivity Transportation Costs Available Technology Economic Efficiency

Rationing Function of Equilibrium Prices Income Constraints WHO WILL GET THE GOODS AND SERVICES? Market System Rationing Function of Equilibrium Prices Income Constraints Resource Prices

HOW WILL THE SYSTEM ACCOMMODATE CHANGE? Dynamic Market Systems Guiding Function of Prices Role in Promoting Progress Technological Advance Creative Destruction Capital Accumulation

Efficiency Incentives Freedom COMPETITION AND THE INVISIBLE HAND The Case for the Market System Efficiency Incentives Freedom

Chapter Conclusions

KEY TERMS private property freedom of enterprise freedom of choice self-interest competition roundabout production specialization division of labor medium of exchange barter money Four Fundamental Questions economic costs normal profit economic profit expanding industry declining industry consumer sovereignty dollar votes derived demand guiding function of prices creative destruction “invisible hand” Copyright McGraw-Hill/Irwin, 2002 BACK END

THE U.S. ECONOMY Coming up next... Chapter 5