CHAPTER 4 notes - Pure Capitalism and the Market CHAPTER...

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Pure Capitalism and the Market CHAPTER FOUR THE MARKET SYSTEM CHAPTER OVERVIEW This chapter begins with a discussion of the institutional framework of the American market system. Brief explanations are given for these characteristics of the market system: private property, freedom of enterprise and choice, the role of self-interest, competition, markets and prices, the reliance on technology and capital goods, specialization, use of money, and the active, but limited role of government. In the final section of the chapter, the authors address the Four Fundamental Questions faced by every economy and explain how a market economy answers each one. LECTURE NOTES I. Characteristics of the Market System A. Private individuals and firms own most of the private property (land and capital). 1. Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, control, use, and dispose of this property. 2. Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and economic growth. 3. Property rights extend to intellectual property through patents, copyrights, and trademarks. B. Freedom of enterprise and choice exist. 1. Freedom of enterprise means that entrepreneurs and businesses have the freedom to obtain and use resources, to produce products of their choice, and to sell these products in the markets of their choice. 2. Freedom of choice means that a. Owners of property and money resources can use resources as they choose. b. Workers can choose the training, occupations, and jobs they wish. c. Consumers are free to spend their income in such a way as to best satisfy their wants (consumer sovereignty). C. Self-interest a. Self-interest is one of the driving forces in a market system. Entrepreneurs try to maximize profits or minimize losses; resource suppliers try to maximize income; consumers try to maximize satisfaction. b. As each tries to maximize profits, income, or satisfaction, the economy will benefit if competition is present. D. Competition among buyers and sellers is a controlling mechanism. 1. Large numbers of sellers mean that no single producer or seller can control the price or market supply. 2. Large number of buyers means that no single consumer or employer can control the price or market demand. 3. Depending upon market conditions, producers can enter or leave an industry easily. E. Markets and prices 61
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Pure Capitalism and the Market 1. A market system conveys the decisions of the many buyers and sellers of the product and resource markets. Recall the demand and supply model in Chapter 3.
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