MARKETS AND GOVERNMENT IN A MODERN ECONOMY

Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. - The Wealth of Nations

ADAM SMITH

The Industrial Revolution modernized the United States and Canada during the 19th century.

Free Enterprise• An economic system in which

private business operates in competition and largely free of state control.

• Sometimes called, “competitive capitalism”.

“Less regulation and lower taxes mean greater freedom”

Laissez-faire• Translates as

“leave as alone”• Government

should interfere as little as possible in economic affairs and leave economic decisions to the marketplace.

WHAT IS

An economy in which decisions regarding investment, production, and distribution are based on market determined supply and demand, and prices of goods and services are determined in a free price system.

HOW MARKETS SOLVE

THE BASIC ECONOMIC PROBLEMS

Who solves the three basic questions?

WHAT?

HOW?

FOR WHOM?In a

MARKETECONOMY

No INDIVIDUAL or

ORGANIZATION is responsible for

solving the economic

problems in a market economy.

Economic Activities are coordinated without coercion or

centralized direction by anybody through the market.

No wheatfields? No Fruit Farms? NO PROBLEM

NEW YORK CITY LIGHTS

UNION SQUARE HOLIDAY MARKET

UNION SQUARE FARMERS’ MARKET

MARKET ECONOMY Is an elaborate mechanism for the unconscious coordination of people, activities, and businesses through a system of prices and markets.

It is a communication device for pooling the knowledge and actions of millions of diverse individuals.

THE MARKET MECHANISMMarket

- where goods are bought and sold.

- is a mechanism by which buyers and sellers of a commodity interact to determine its price and quantity.

Centralized- As for stocks, bonds and wheats.

Decentralized- As for houses or used cars., may even be electronic market.

Economic miracle = result of a smoothly running economic mechanism

Equilibrium of Supply and Demand

WHAT? HOW? FOR WHOM?

THE MARKET EQUILIBRIUM

This is where the quantity demanded and quantity supplied are equal.

The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

Thank You