OUTLINE -- CHAPTER 4

We won't have time to cover all of this chapter in class. We will cover some of the concepts in other chapters, but for the most part students are to study this chapter on their own.

• Be sure to do the assignments.
• Here is a list of the chapter vocabulary.
• Here are some notes from the instructor's manual.

Pure Capitalism and the Market System: The Market and the 5 Es

I. Economic Systems (pp. 33-34)

• A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem;
• a method of organizing an economy;

  A. Criteria

  1. who owns?
  2. who decides?

  B. Types

  1. pure capitalism (market economy)

  An economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities.

  2. command economy (socialism)

  An economic system (method of organization) in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities.

  3. All modern economic systems are mixed systems

   

II. Capitalist Ideology: Basic Characteristics

A. private property
B. markets and prices (supply and demand)
C. role of self interest: incentives
D. freedom of enterprise and choice
E. competition (ch. 10)

1. large numbers
2. free entry and exit
3. produce standardized products

F. limited role for government

II. The Market System at Work

A. The Market and the 5Es

1. Economic Growth

a. Define
b. Economic Growth and Capitalism

(1) private property
(2) self interest
(3) freedom of enterprise and choice

c. market economics tend to have faster growth rates than do command economies

2. Allocative Efficiency: Producing what consumers want

a. Capitalism and Self Interest / incentives

(1) more profits = produce more
(2) losses = produce less
(3) consumer sovereignty and "dollar votes"

b. Captitalism tends to achieves allocative efficiency

3. Productive Efficiency: Producing at a minimum cost

a. Captialism and Self Interest / incentives

(1) profits = total revenues - total cost
(2) minimizing costs means more profits

b. Capitalism tends to achieve productive efficiency

4. Equity

5. Full Employment

B. Summary:

1. Capitalism provides the incentives (profit) for a PRODUCTIVELY EFFICIENT use of resources

2. The price mechanism (supply and demand) provides for and ALLOCATIVELY EFFICIENT use of resources

3. Capitalism does not have a mechanism to assure EQUITY. This may be a role of government

4. Economists disagree over whether capitalism will guarantee FULL EMPLOYMENT.

5. The move toward capitalism has resulted in high rates of ECONOMIC GROWTH in many countries. Profits, private property, and freedom of enterprise and choice promote growth

 

Pure Capitalism and the Market System: The Market and the 5 Es Characteristics of a Market Economy (Capitalism) A. private property B. markets and prices C. role of self interest: incentives D. freedom of enterprise and choice E. competition 1. large numbers 2. free entry and exit 3. produce standardized products F. limited role for government The Market and the 5Es 1. Economic Growth Capitalist economies tend to have more rapid rates of growth 2. Allocative Efficiency: Producing what consumers want a. Capitalism and incentives (1) more profits = produce more (2) losses = produce less (3) consumer sovereignty and "dollar votes" b. Capitalism tends to achieves allocative efficiency 3. Productive Efficiency: Producing at a minimum cost a. Capitalism and incentives (1) profits = total revenues - total cost (2) minimizing costs means more profits b. Capitalism tends to achieve productive efficiency 4. Equity There is no characteristic of capitalism which will guarantee equity Often, the government gets involved to help achieve equity 5. Full Employment Economists disagree over whether capitalism will result in full employment Some say yes, and if there is unemployment it is usually caused by government interference Some say no, and at times government involvement is needed to move the economy towards full employment