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The Market System

The Market System. Profit and Competition. Efficient Markets. The Evolution of the Market System. What do we want from an economy?. Production – getting the most from scarce resources Exchange – minimizing transaction costs. Social Cooperation: How does this happen?. Kenyan coffee

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The Market System

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  1. The Market System Profit and Competition

  2. Efficient Markets The Evolution of the Market System

  3. What do we want from an economy? • Production – getting the most from scarce resources • Exchange – minimizing transaction costs 7 Market System

  4. Social Cooperation: How does this happen? • Kenyan coffee • Scottish sweater • Banana from El Salvador • Dishwasher assembled in Mexico • Thai restaurant • French movie • Stereo from Hong Kong 7 Market System

  5. Because of scarcity, someone will always be told NO! • The trick is to get as much as possible from scarce resources. • What are the most efficient systems of production and exchange? 7 Market System

  6. Different methods of production and exchange • Tradition -There is no need for success; you do what your parents did. • Command – You do as you’re told. • The market - You do what is in your best interests and by so doing, provide the material wants of society; incentives are the key. 7 Market System

  7. Market: An interaction of buyers and sellers 7 Market System

  8. Necessary Components of a Market (CIIP) Competition Information Incentives Property Rights

  9. 1776 7 Market System

  10. ADAM SMITH(1723 - 1790) Profit is the motivator, competition is the regulator. 7 Market System

  11. Profit is the Motivator “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.” 7 Market System

  12. Competition is the Regulator “If he charges too much for his wares, or if he refuses to pay as much as everybody else for his workers, he will find himself without buyers in the one case, and without workers in the other.” 7 Market System

  13. The Invisible Hand (self-interest and competition): • rewards efficient producers and buyers • results in: • goods society wants • quantity society wants • prices society is willing and able to pay • normal profits 7 Market System

  14. The Entrepreneur: the driver of the market system. • combines resources to produce a product • takes the risks associated with innovation • the “residual claimant” 7 Market System

  15. Why the market? • Scarcity exists • Societies must find a way to allocate scarce goods and services • In any allocative mechanism, some people will be told “No.” • The market system is efficient, but… • Neither markets nor other economic systems are “fair.” 7 Market System

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