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.

 

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

I. Capitalist Ideology: Basic Characteristics

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

II. The Market System at Work

A. The Market and the 5Es
1. Economic 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. Captitalism tends to achieves allocative efficiency

3. Productive Efficiency: Producing at a minimum cost

a. Captialism and 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 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

 

C. Two Important Components of the Market System

A. Specialization and Comparative Advantage (Chapter 6, pp. 98-100, 474-479)

B. Supply and Demand (Chapter 3)

 

III. Specialization and Comparative Advantage

A. Should We Have Free Trade With Other Countries?
B. Why AND Why Not?
  • Spend a few minutes writing down your ideas.
  • State your opinion and defend it
  • also, state arguments that oppose your opinion

C. Many people use anecdotal evidence to oppose freer trade
D. but most economists favor freer trade http://www.ncpa.org/pd/trade/pdtrade/pdtrade10.html
E. Questions and Answers

III. The Economic Basis for Specialization and Exchange -- Trade

A. Pre-quiz
B. Why we specialize and exchange?
1. What would life be like if YOU were self-sufficient?

2. advantages and disadvantages

a. advantage:
  • larger total output / higher living standards
  • lower prices

b. disadvantage:

  • less independence / more interdependence

3. the basis for specialization and exchange

a. differences in resource endowments
b. differences in preferences
c. differences in productivity (MORE BELOW)
1) define productivity
2) define absolute advantage
3) a good lawyer trades with a good mechanic

d. differences in opportunity costs (MORE BELOW)

1) define opportunity cost
2) define comparative advantage
3) The lawyer/mechanic argument revised

C. Differences in Productivity: Absolute Advantage

1. production possibilities: self sufficiency
2. specialization
3. trading possibilities: more total output

D. Differences in Opportunity Costs: Comparative Advantage

1. production possibilities: self sufficiency
2. specialization
a. comparative advantage
b. calculating opportunity costs

3. trading possibilities: more total output

"Specialization according to comparative advantage results in a more efficient allocation of the world's resources, and larger outputs ...." (McConnell and Brue 1993)

4. trade with increasing costs
a. review: law of increasing costs
b. result: specialization is less than 100%