1. Chapter 8 The Power and Limits of Markets
Introduction to Economics: Social Issues and Economic Thinking
Wendy A. Stock
PowerPoint Prepared by Z. Pan
Chapter 8 The Power and Limits of Markets
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2. After studying this chapter, you should be able to:
Describe the resource allocation and resource ownership decisions facing societies
Classify the basic types of economic systems
Describe the differences in types of ownership of resources
Describe the differences in types of decision making about resource allocation
Evaluate the tradeoffs between efficiency and equity; security and liberty
Understand the concept of market failure
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3. Resource allocation and ownership decisions
The resource allocation decisions of a society determine how the resources are shared among society’s citizens.
The resource ownership decisions of a society determine the property rights over the resources in a society.
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4. Resource Allocation systems
Command Systems use governmental regulation or central planning to allocate resources.
Market Systems use decentralized interactions between buyers and sellers to allocate resources.
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5. Resource Ownership systems
Socialist Systems use public property ownership.
Capitalist Systems use private property ownership.
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6. TYPES OF ECONOMIC SYSTEMS
Market Capitalism is an economic system that uses private property ownership and private resource allocation decisions.
Command Socialism is an economic system that uses public property ownership and public resource allocation decisions.
Market Socialism is an economic system that uses public property ownership and private resource allocation decisions.
Command Capitalism is an economic system that uses private property ownership and public resource allocation decisions.
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7. TYPES OF ECONOMIC SYSTEMS
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8. JUDGING ALTERNATIVE ECONOMIC SYSTEMS
Efficiency
Market capitalist systems are quite effective at generating efficient resource allocations.
The Invisible Hand is the self-regulating mechanism of market systems that generates allocation of resources based on self-interest, competition, and comparative advantage.
Command socialist systems are not as well suited to generate economic efficiency.
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9. JUDGING ALTERNATIVE ECONOMIC SYSTEMS
Equity
Market capitalist systems are unlikely to produce equitable results.
Command socialist economic systems are more likely than market capitalist systems to achieve an equitable resource allocation.
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10. JUDGING ALTERNATIVE ECONOMIC SYSTEMS
Liberty (Individual Freedom) Because they rely on individual actors and individual decision-making, market based systems tend to generate more personal liberty than do command-based systems. Similarly, because they rely on private rather than public property, capitalist systems tend to provide more liberty than do socialist systems.
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11. JUDGING ALTERNATIVE ECONOMIC SYSTEMS
Security Because command socialist economic systems tend to be more equitable, and because obtaining that equity involves redistribution of income from some groups to others through taxes or other policies, command socialist economic systems generate more economic security than do market capitalist economic systems.
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Market Failure
Market Failure - When the market generates an inefficient allocation of goods or services.
Monopolies
Public Goods
Externalities
Imperfect Information
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Market Failure
Monopolies A monopoly is a market with only one seller of a good or service.
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Market Failure
Public Goods A public good is one where the seller cannot exclude nonbuyers from using it.
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Market Failure
Externalities Externalities are costs or benefits of a trade that are imposed on people outside the trade.
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Market Failure
Imperfect Information Imperfect information occurs when the full costs or benefits of a trade are not known to all of the parties engaged in the trade.
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17. Questions/Discussions
China and many of the countries in Central and Eastern Europe are classified as “transition economies” because they are in the process of moving from centrally planned, command socialist economic systems toward market capitalist systems. What kinds of changes do you think take place for individuals and policy makers during this process?.
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18. Copyright © 2013 John Wiley & Sons, Inc.
Key Concepts
Resource allocation
Market socialism
Resource ownership
Command capitalism
Command system
Invisible hand
Market system
Market failure
Socialist system
Monopoly
Capitalist system
Public good
Market capitalism
Externalities
Command socialism
Copyright © 2013 John Wiley & Sons, Inc.