Transcript Free Enterprise in a Mixed Economy

Free Enterprise in a Mixed
Economy
Market Economy
 Characteristics
1.
Private Property
2.
Self-interest
1.
Motivating factor to express free choices and enterprise
3.
Freedom of Enterprise and Choice
4.
Competition
1.
It diffuses power and it serves as a regulatory mechanism
Market Economy
 Characteristics continued
5.
Markets and Prices
6.
Reliance on Technology and Capital Goods
Creates efficiency
7.
Specialization
8.
Use of Money
Bartering doesn’t work
9.
Limited Government— “Invisible Hand”
5 Questions for a modern day economy
1.
What will be Produced
2.
How will it be Produced
3.
Who will get the Output
Plus two new questions
4.
How will the system Accommodate Change
5.
How will the system Promote Progress
What happened to the Command Systems?
 Lack of Coordination
 Planners (government) had to establish production targets and provide all the inputs
necessary for the production and delivery of goods (bureaucracy); the measure of success
was quantitative, not qualitative
 Lack of Incentives
 Why work hard when I get nothing in return
 Why produce something when I don’t get to keep it
Circular Flow revisited
Households
 116 million+ households today
 Primary suppliers of resources and biggest spenders
As income receivers they earn rents, interests, profits and wages make up bulk of income
As spenders, taxes make up 14% of household incomes and savings if certain criteria is met (@ 50%
of our personal consumption is spent on services)
Circular Flow
Businesses
 Sole Proprietorship
 Easy to organize, one owner, keep all profits
 But too risky, along limitations of one person
 Partnership
 Two better than one
 But a liability issue, partners disagree, limited money
 Corporations
 Unlimited life, limited liability
 Difficulty to form and lots of taxes
The Public Sector in the circular flow
 Government serves 5 basic functions in our “market” economy
 Legal and Social Framework
 Establishes laws and regulations to ensure private property rights
 Provides a system of order and standards, along with enforcement rule
 Pure Food and Drug Act, OSHA,
 Too many rules, however, can stifle growth
 Redistribute Income
Public Sector continued

The market economy creates an
unequal society, thus government
steps into help those left behind
Transfer payments—welfare,
Medicaid, food stamps
 Maintain Competition
 Monopolies can ruin a market
economy, therefore government is
needed to regulate and minimize such
behavior
Some industries have natural monopolies
Market intervention—price floors and
ceilings
Taxation—progressive income tax
payment based on
marginal tax rate
Public Sector continued
 Reallocation of Resources
 Stabilize Economy
 Market failure occurs when the wrong
resources are being allocated
 Working to achieve full employment of
all resources and control prices
 Spillovers—when certain benefits or
costs escape the buyer and seller and it
effects parties other than the
immediate buyer and seller (spillover
costs and benefits)
 Unemployment and Inflation are
controlled by the government through
various means called fiscal policy
(Costs) Pollution example
Government corrects for such problems
with legislation or taxes
(Benefits) Education, immunization
Government corrects for this by a)
subsidizing customers, b) subsidizing
suppliers, c) providing on their own
Circular Flow with the government
Problems and Controversies
 Obviously, the level of government involvement in the economy has mixed
reviews