Market systems

Market

• Buyers and Sellers- voluntarily there, old days- physical site, today virtual (NASDAQ) Amazon.com, Craigslist.org

• Interaction of the aggregate of buyers and the aggregate of sellers-> a market price– > shortage-> higher prices– >surpluses-> lower prices

Freedom of Enterprise/Work Choice

• If incentives and interest arise (self-interest), individual(s) can enter into a business to produce a good or provide a service.

• Individual(s) can enter into the labor market or the entrepeneurial market as they choose

• Limited impediments to relocation, or starting a new business or closing down an existing one

• In a market economy, economic profits or returns are the primary incentive

Consumer Soverienty- Consumers decide what they want and

make their $$$ votes at the market- Consumers can use their $$ as they

want- few, if any limits to what the buyer can choose to buy (rational self-interest)

- Sellers look to accommodate buyers- dependent upon their return to capital

Competition

• Confluence of Sellers interested in making a return on capital and buyer’s acting in their own self-interest

• Constant pressure on seller’s to come up w/new ideas or better methods of production– Specialization

• Creative Destruction- Polaroid? Betamax? Blackberry? Mom and Pop stores?

Private Property, a Legal System

• Property rights are clear and justiciable– Right to improve/change property– Right to sell, hypothecate (lien) property– Laws that ensure that future buyers and lien

holders have an interest in the property– Efficient and Peaceful means to resolving claims

w/minimal cost

Limited but Active Government– Ensures transparency and information that allows producers and

consumers to understand the costs embedded in a product and consumers to reliably get the product they think they’re getting

– Information- quick and efficient means of getting product information to the consumer and relaying sales information back to the producer

– Regulation- ensures that private costs do not become social costs– Infrastructure- When social benefits of a good/service exceed

private benefits, government facilitates a means to bringing the product/service to market.

– Businesses and Consumers can expect a relatively stable government environment so that they can make short and long term plans

Monetary system

• A reliable and stable medium of exchange– Divisible– Storer of Value– Transportable– No need for a double coincidence of wants– Liquid

Capital Accumulation

• Private and Government system has an efficient method of pooling capital to reduce risk and amass funds

• Few transactional costs• Corporate form provides limited liability and

spread risk

Free Markets = Panacea?

• Market Failure– When PMB doesn’t equal SMB or when PMC

doesn’t equal SMC– Public and Quasi-Public Goods– Externalities– Perverse incentives? Rational self-interest

Principle-Agent – Ensuring Competition– Regulating v. State ownership

Public Goods

• Can’t exclude people from using the product service?

• My use of the product doesn’t interfere w/your use?

• A little bit of the above plus lots and lots of social benefits?

• French Fries versus Military Defense?• Park? School? Bridge? (Market Failure?)

Government to the Rescue?

• SMB > PMB or SMC > PMC– Value SMB, SMC? Externalities– Creating Markets? Credits? Pollution Rights– Taxes, Subsidies, Quotas– Government assisted projects—Internet,

Medicines• I can’t lose? Risk v. Reward and Moral Hazard• Ensuring competition- Anti-Trust Legislation