capitalism – central idea – producers free to produce the goods and services that consumers want...
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Capitalism – central idea – producers free to produce the
goods and services that consumers wantconsumers influenced by desire to buy goods
and services to satisfy econ. Wantsproducers influenced by desire to earn profits
Free enterprise system –
What is a Free Enterprise System?
Monica Ramirez – starts business of cosmetics for Latinascreates Zalia Cosmeticsput whole saving account into business – soon
gained backers to invest in businessoutlets in major Hispanic markets – business
growing – gives back to support Latina Entrepreneurs
Example: United States
One of 585,000 new businesses in US in 2001 – can see businesses everywhereall examples of how individuals choices are the
basis of a market economyowners choose to start the enterpriseowners choose how to use their scarce productive
resourcesmanagers and workers voluntarily exchange labor for
payconsumers choose which goods and services they will
buy
Govt. action usually limited –designed to protect or encourage competition or enforce contracts
Mexican Economy
Govt. plays much larger role then US govt.rules and regulations
make starting business difficult
informal market has grown as a result – has driven retail stores out of business
street vendors and vendors with stalls
Govt. very closely involved with economy (Singapore Inc.)
Govt. says what benefits employers must provide employees
Workers must put certain percentage in Central Provident Fund – govt. saving scheme fund pays pensions, and funds
public projects (ed., health care, housing)
Govt. supportive of free enterprise keeps business rents, taxes and
costs low
Example: Emerging Markets
Singapore
Key freedom – private property – can exchange it voluntarily – heart of free enterprise
Open opportunity – the ability of everyone to enter and compete in the marketplace of his or her own free choiceensures market reflect wide range of interests &
talents and provides incentive to be efficient and productive
Legal equality – a situation in which everyone has the same economic rights under the law
Free contract – for voluntary exchange to work, people must be able to decide for themselves
How a Free Enterprise System Works
Which legal agreement they want to enter into – business, job, or purchase commitment
What motivates people to start a business?Profit motive – the incentive that encourages
people and organizations to improve their material well-being by seeking to gain from economic activities
Producers seek highest possible price for productCompetition offsets drive and forces prices downHelps producers find price that does not deter
buyer or inhibit profits
Pet rock – Gary Dahl – a pet rock easier to care for than regular petswrote a manual on pet rocks – training , tricks…Aug. 1975 – packaged and sold with manual at
gift showsmajor department store purchased 500became major story, with interviews and
articlesby end of year – sold more than 2 tons – he is
millionaire1976 – consumers lost interest – Dahl gets out
of the business
Example: Profit in Rocks
Example: Competition Over Books Books different then pet rocks –
fierce competition before 1995 – small chain
stores and neighborhood booksellers dominate market
1995 – large chain stores – Barnes & Noble Inc. and Border Group Inc. begin to compete can buy in high volume and
pass savings to consumer warm & welcoming atmosphere
in stores – reading areas, cafes, book signings
1991 – independent booksellers account for 30% on book sales in US
by 2005 – down to 15% between 1995-2005 – 1,200 ind.
Bookseller went out of business
New challenge for chains – Amazon.com huge database, quick & reliable
delivery, discount prices, easy to use web site
by 2004 – sales at $134 million a week
New challenge for Amazon – Overstock.com & Buy.com undercut Amazon’s prices and
has excellent service Consumers benefit from competition Ind. Booksellers cannot match prices
can provide personal service and focus on local tastes or specialized topics
example of those who keep pace with the market and adjust accordingly
Economic Pacesetter: Milton Friedman: Promoter of Free MarketsEconomics professor – b.
July 31, 1912 – d. Nov. 16, 2006 career teaching at U. of
Chicago – free market ideas – “Chicago School of Economics”
Market should be free to operate in all fields – even law & medicine lowering licensing
standards would bring more dr. and lawyers into market
would bring down costs of services
Govt. most important role is to control the amount of money in circulation with no control, economy
would experience inflation Advisor for 2 presidents and
head of state for several other countries 1976 – won Nobel prize for
Economics 1980 – wrote Free to Choose –
best seller nonfiction 1977 – 2006 – served as
scholar at Hoover Institution, conservative public policy research center at Stanford University
Profit – the money left over after the costs of producing a product are subtracted from the revenue gained by selling that product
Seeking profit is one way producers help allocate scarce resources in the economy
The Roles of Producers and Consumers
Example: Producers Seek Profit
Neighborhood coffee shopowners charge highest
price consumers are willing to pay
possibility for good profit encourages other to open shops
productive resources got to the coffee shops instead of other businesses
profit seeking helps in allocation of resources
When consumers buy a product, they vote for it vs. another productvotes determine what will
be produced in the futureex. – low carb diets –
interests peak and fall – producers respond based on votes of the
Consumers-consumer actions cause a reallocation of resources
Example: Consumers Vote
With Their Wallets
Government in the US Economy
Modified free enterprise economy – includes some govt. protections, provisions, and regulations to adjust the free enterprise system
Figure 2.4 showed flow of resources and products moving in a circular flow between businesses and households
Figure 3.4 shows how govt. fits in Govt. exacts costs and gives benefits green arrows show flow of money blue arrows show flow of products and resources govt. is both consumers and producer
consumer in the resource market – spending to buy factors of prod.
consumer in product market – spending money in exchange for products
a producer – providing goods & services to households & businesses
collects money from businesses & households in form of taxes
covers costs of what is produced with this money uses money to make purchases in the resource and product
market
Figures 3.5 & 3.6 – show govt. a major consumer of resources and products govt. employs about 22 million workers – 16% of labor
force govt. consumption is over 2 trillion
Modified Free Enterprise
Most production decisions made in the marketplace through the interaction of buyers and sellers – the free enterprise sectordecisions made by different levels of govt. – the public sector
which sector produces a good or service?if all costs borne by and benefits go to the buyer and seller, the free
enterprise sector
Market failure – people who are not part of the marketplace interaction benefit from it or pay part of the costswhen this happens – govt. sometimes provides goods or
servicePublic goods – goods and services that are provided by the
govt. and consumed by the public as a grouppublic goods are funded with taxes
Providing Public Goods
Public goods have 2 characteristics:1. people cannot be excluded from the
benefits of the product even if they do not pay for it
2. one person’s use of the product does not reduce its usefulness to others
Example: Characteristics of Public Goods
Street lighting Impossible to exclude
people from using it the benefit is not
diminished because other people use it
no way for private business to establish a realistic price and collect
local govt. provides and collects taxes to cover cost
Everyone benefits from it the benefit is not
diminished because other people feel secure
Given the benefit – you would readily pay for sense of security
Everyone pays through taxes to national govt.
National defense
No incentive for business to produce public goods – people will not voluntarily pay for itpeople receive the benefit of these goods
whether they pay or notFree rider – is a person who chooses not to
pay for a good or service but who benefits from it when it is providedone type of market failure
Example: Free Riders
Fireworks Shows Shows are very expensive – no
way to charge people for watching the show can charge for a very good
spot, but others will still be able to see it
those who do not pay – free riders
Little interest in providing fireworks displays as a business opportunity to address problem – govt. to
provide certain goods and services
city govt. puts on the show and pays for it with taxes
costs and benefits shared throughout the community
Police ForceEveryone is
protected whether they pay or notbest way to ensure
that those who benefit pay their share is for govt. to provide the service by paying for it with taxes
Some goods provided by either sectoroften toll goods – goods consumed by the
public as a group, but people can be excluded from using them
open for all to use, but have to pay a toll to useinitial funding for toll goods is provided by the
public sector, but day to day is provided by the private sector
Public and Private Sectors – Shared Responsibilities
Public and private share responsibility for the nation’s infrastructure
Ex. – highways, mass transit, power, water, sewer systems, education, health care systems, fire and police services if not have these things –
economy would come to a halt
lose ability to move troops in case of attack and evacuate in emergency
Infrastructure – essential to economic health
Externality – a side effect of a transaction that affects someone other than the producer or the buyer
Negative externality – is an externality that is a negative effect or cost for the people who are not involved in the original economic activityex – manufacturing company discharges pollution into a
river – cost of pollution is borne by those who live near the river – even if no connection to company
Positive externality – is an externality that is a positive effect or benefit for people who were not involved in the original economic activityneighbor plants a rose garden – everyone benefits from
beauty
Managing Externalities
Industrial pollution Company has little incentive to
pay extra to reduce pollution those living around it are going
to suffer from it, bear the cost of clean-up and bear the medical costs if ill
Limiting negative externalities is important role of the govt. govt. taxes or fines polluters money raised can offset higher
medical costs Tax or fine provides incentive
for owner to reduce pollution
Example: Paying For the Negative Externalities
New college built Local business benefit from student
purchases Workers benefit as businesses expand Community benefits – taxes collected form
students, more skilled and knowledgeable population local govt. can spend more to provide
public goods govt. tries to increase positive externalities
Subsidy – is a govt. payment that helps cover the cost of an economic activity that is considered to be in the public interest comes from taxes , so everyone shares the
cost ex. – given to drug companies to develop
new vaccine will benefit the whole community once it is
in effect
Example: Spreading Positive Externalities