Transcript Monopoly (Ch.10) - Principles of Microeconomics

The Market System
Principles of Microeconomics
Boris Nikolaev
How many…
…of you consider yourself a capitalist?
… a liberal?
“Any 20-year old who isn’t a liberal doesn’t have a heart, and any
40 year old who isn’t conservative doesn’t have a brain.”
W. Churchill
Some famous communists
Economic systems
Every economic system tries to answer 3 fundamental
questions:
• What to be produced?
• How to produced?
• For whom to be produced?
Capitalism vs Communism
http://www.youtube.com/watch?v=u6H63CD7uQA (1948 Propaganda)
USA
China
Mixed Economy
Pure Communism
Central Planning
Command Economy

Pure Capitalism
Free Market
Laissez Faire

Von Mises and the challenge of calculation
• “Economic Calculation in the Socialist Commonwealth”
(1920)
• Who will do the dirty job?
Human nature and the herd mentality
• Change human nature.
• Material vs moral incentives.
• But even then who would do the social calculation? It seems
impossible.
The Use of Knowledge in Society
• Main problem is how to use available knowledge.
• Some knowledge is scientific; others is tacit (some
even wrong).
• No way to know the second type
• Market is a discovery procedure (trial and error)
• Prices reveal relative scarcities.
• Spontaneous order (cosmos)
(result of human action; not planning)
The Circular Flow of Income
Characteristics of the Market Economy
1.
2.
3.
4.
5.
6.
7.
8.
9.
Protection of Private Property.
Freedom of Enterprise and Choice.
Self-Interest.
Competition.
Markets & Prices.
Technology & Innovation.
Specialization (division of labor).
Sound money.
Active, but limited government.
Protection of Private Property
• The Tragedy of the Commons.
The Mystery of Capital
Why Capitalism Triumphs in the West and Fails Everywhere Else?
Freedom of enterprise and choice
Arnold Schwarzenegger on Freedom [watch here]
Self-Interest
(recollect previous lecture)
• 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
maximize satisfaction.
• As each tries to maximize profits, income, satisfaction, the
economy will benefit if competition is present.
Markets, Prices & Profits
• Market – institution that brings buyers and
sellers together.
• Prices – convey information about products.
• Those who respond to market signals are
rewarded with profits.
I, the pencil [watch here]
Competition
Assumptions:
1. Many buyers & sellers  no single buyer or seller
can set up the price.
2. Free entry and exit  efficiency in the long-run.
Technology & Capital Goods
• All of the above (protection of private property,
freedom of choice, etc…) provide incentive for capital
accumulation (investment).
• Technology and capital goods  efficiency, variety &
greater output.
Sound Money
•
•
•
•
Zimbabwe’s Guinness Record
Dec, 2008 - 231,000,000% inflation.
Prices doubled everyday.
People abandoned their currency.
[watch here]
Active but limited government
• T. Hobbes’: “The state of nature” and the
existence of social contract.
“During the time men live without a common power to keep them all in awe, they are in
that condition which is called war; and such a war as is of every man against every man"
(Leviathan, ch. XIII)
• We need a government to ensure that the
above conditions (protection of private
property, freedom of choice, sound money,
etc…) are satisfied…so that capitalism can
work.
• Also recollect from last lecture that markets
fail (externalities, etc…), which is another
reason for the existence of a government.
Capitalism: A Love Story
• Efficiency
• Incentives
• Freedom
Competition & The Invisible Hand
“It is not from the benevolence of the butcher, the brewer,
or the baker that we expect our dinner, but from their
regard to their own interest.”
Adam Smith
http://www.youtube.com/watch?v=okHGCz6xxiw&feature=related
(Margaret Thatcher on Socialism)
Andy Warhol on Capitalism
"What’s great about this country is that America
started the tradition where the richest
consumers buy essentially the same things
as the poorest. You can be watching TV and
see Coca Cola, and you know that the
President drinks Coca Cola, Liz Taylor drinks
Coca Cola, and just think, you can drink Coca
Cola, too. A coke is a coke and no amount of
money can get you a better coke than the
one the bum on the corner is drinking. All
the cokes are the same and all the cokes are
good. Liz Taylor knows it, the President
knows it, the bum knows it, and you know
it."
Andy Warhol
Problems with Capitalism
• People with no resources starve (promotes
[watch here]
inequality).
• Concentration of power (monopolies, oligopolies).
• Markets fail (recollect externalities, public goods).
• Firms have no incentive to produce “social goods.”
Problems with Communism
• Resources are used inefficiently.
• No incentive to improve land.
• Central planners (the communistic party) serves their
own interest, not the interest of the people.
• Less variety of products.
• Less personal/ economic freedom.
Who grew faster?
• China vs Taiwan
North Korea vs South Korea
• 1948 Korea is divided into South and North.