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The document discusses the principles of market economies, emphasizing the benefits of the division of labor, specialization, and the concept of the 'invisible hand' guiding market efficiency. It outlines the structure of free markets, the roles of households and firms, and the limitations of free markets, such as monopolies and environmental issues, which necessitate government intervention. Ultimately, it introduces the mixed economy as a balance between free market and government involvement to address societal needs while promoting individual success.

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4 views

8

The document discusses the principles of market economies, emphasizing the benefits of the division of labor, specialization, and the concept of the 'invisible hand' guiding market efficiency. It outlines the structure of free markets, the roles of households and firms, and the limitations of free markets, such as monopolies and environmental issues, which necessitate government intervention. Ultimately, it introduces the mixed economy as a balance between free market and government involvement to address societal needs while promoting individual success.

Uploaded by

parmisbagheri1386
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Market

Economies:
Problems and
Solutions?
Review: Adam Smith
1) Division of Labour works at an individual level
a) People work better when they can specialize and
focus on one thing
2) Division of Labour works for entire countries!
3) Specialization also works for country’s → Free Trade!
a) Focus on what you’re good at → trade for the rest
4) The INVISIBLE HAND → Guides markets in a way that's
best for everyone
a) Businesses want MONEY
b) Customers want good quality products
What is a “Market” anyway?
(Review)
A market is an ARRANGEMENT that
allows buyers and sellers to exchange
things.

Markets allow for people to meet their


needs without having to produce
everything themselves.

Examples: Farmer’s Market, Sporting


Goods store, New York Stock exchange, a
community bulletin board, Facebook
marketplace.
Free Market
In a FREE MARKET economy, answers to all three
economic questions are made by VOLUNTARY
EXCHANGE in MARKETS.
NO GOVERNMENT INTERVENTION - NO “TOP
DOWN” PLANNING

1) What goods and services should be


produced?
2) How should these goods and services be
produced?
3) Who consumes these goods and services?

Remember, these questions are answered


differently in COMMAND and TRADITIONAL
economic systems.
The Rules
In the last two classes, we
analyzed the “rules” of a Free
Market Economy.

How is ZERO GOVERNMENT


INTERVENTION meant to work?

1) Incentives
2) The “Invisible Hand”
The Participants
The participants in a free
market economy are:

HOUSEHOLDS: Regular people


like you and me! Households
own the factors of production:
Land, Labour and Capital.

FIRMS: A business or
organization that produces
goods or services which it then
sells.
Review: Factors of Production
Remember, the factors of
production is just a fancy way of
saying:
“THE RESOURCES REQUIRED TO
PRODUCE”.

LAND: Natural Resources


LABOUR: People with their efforts
and ability
CAPITAL: Tools, equipment +
machinery used in production.
(+Brain tools)
ENTREPRENEURS: Individuals
who combine the factors of
production and start a business
The Circular Flow
Model
Economists use the CIRCULAR FLOW MODEL to make
sense of how society’s resources flow through a
market-based economy.

In this model, we can make sense of two essential markets.


● Firms purchase or
rent land
● Hire workers
paying them wages
● Borrow money
from households
to purchase
capital, paying
households
interest in return.

The FACTOR MARKET: The arena of exchange which firms


purchase the factors of production from households.
Product Market: The arena of exchange in which households
purchase goods and services from firms
ALL TOGETHER NOW
For another explanation, watch this video
The Limits of the
Free Market
Limitations of the Free Market
While the Free Market is theorized
as producing the most efficient
outcomes based on competition,
the Free Market model does have
some limitations.

In some areas, what is best for


society is not always best for the
individual business (self-interest).
Alternatively, some services that
society needs are not always
profitable.
Examples of Free Market Failures
Monopolies and Unfair Competition:

□ Simple Explanation: Imagine if one company controlled all the toy


stores in town. They could set very high prices, and you'd have no
choice but to pay a lot for toys.

□ Why Government Intervention is Necessary: The government steps


in to make sure there's competition and fair prices. They break up big
companies that dominate markets and make rules to keep
competition healthy. This way, you have more options and better prices.
(see also oligopolies)
Pollution and Environmental Damage:

▪ Simple Explanation: If factories can just dump waste into rivers and
the air without consequences, the environment can get very dirty and
harm plants, animals, and people.

▪ Why Government Intervention is Necessary: The government makes


rules and laws to limit pollution. They set standards that companies
must follow to keep the environment clean and safe for everyone.
Examples of Free Market: Cont’d
Infrastructure: Roads and Highways:

Simple Explanation: Imagine if every road was owned by a different company, and you
had to pay each one to use them. Getting around would be really complicated and
expensive! (Also probably not profitable for entrepreneurs)

Why Government Intervention is Necessary: The government builds and maintains


roads. They're like the organizers of a game, making sure everyone can play and move
around easily without too much cost. It's a shared benefit for everyone in society.

Healthcare:

Simple Explanation: In a totally free market, hospitals and doctors might only help
people who have a lot of money. If you're sick and can't afford to pay, you might not get
better.
Why Government Intervention is Necessary: The government steps in to make sure
everyone can access healthcare, even if they don't have much money. They create
programs, fund hospitals, and help people afford medicine. This way, everyone gets a
chance to be healthy and live a good life.
Government Intervention
For this reason, no economy on earth can be defined as purely “free market”.
Government typically play some role in answering the three basic economic
questions.

How do governments intervene?


▪ Breaking up monopolies
▪ Taxation
□ Pay for services that benefit everyone
□ Schools
□ Hospitals
□ Roads
▪ Regulating Quality
□ Food
□ Medicine
□ Business Practices
The Mixed Cue Hannah Montana...
Economy
You get the BEST OF BOTH WORLDS
Most popular economy in the
developed world today
A mix between a command economy
and a market economy

The government participates in


making economic decisions

BUT individual consumers and firms


participate in making economic
decisions as well
3 basic economic questions
Answered by the CONSUMERS, FIRMS
AND THE GOVERNMENT.

1) What goods and services should be


produced?
2) How should these goods and
services be produced?
3) Who consumes these goods and
services?

Goal: Limit the gap between the rich and


poor and ensure that people have the
opportunity to succeed in society.
However, it still allows for the freedom to
incentivize hard work in order to achieve
financial success.

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