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Pure Capitalism Pure Capitalism and theand the
Market SystemMarket System
Chapter 4:
The Invisible Hand
S
The Model of Demand & Supply Price Formation in the Market System P
o Q
P Q D
D
P Q S
Price of Corn
Quantity of Corn
CORN CORN
Review:
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A case of Government Intervention: Price Ceilings P
o Q
D
S
A case of Government Intervention: Price Ceilings
P
o Q
D
Legal Price
RENT CONTROL
S
A case of Government Intervention: Price Floor P
o Q
D
S
A case of Government Intervention: Price Floors P
o Q
D
Legal Price
MILK PRICE
Nine Foundations of Capitalism
1.2. PRIVATE PROPERTYFREEDOM OF ENTERPRISE & CHOICE 3.4. ROLE OF SELF-INTERESTCOMPETITION
5. MARKETS & PRICES 6.7. AACTIVE BUT LIMITED GOVERNMENTEXTENSIVE USE OF CAPITAL GOODS 8.9. SPECIALIZATION AND EFFICIENCYUSE OF MONEY
1. What output will be produced? - Economic Profit = total revenue – total cost
- Normal Profit v/s- Profits and expanding industries Economic Profit
- Losses and declining industries- Consumer sovereignty and “Dollar Votes”
- Derived demand
2. How will output be produced? - Economic efficiency and techniques of Production
3. Who will get output? - Willingness and ability to pay
4. How will the system change? - Guiding function of prices
The Market System at WorkFour Fundamental Questions
The Invisible hand
The Case for the Market System: The Case for the Market System:
1. Efficiency1. Efficiency
2. Incentives2. Incentives
3. Freedom3. Freedom
private propertyprivate propertyfreedom of enterprisefreedom of enterprise
freedom of choicefreedom of choiceselfself--interestinterest
competitioncompetitionroundabout productionroundabout production
specializationspecializationdivision of labordivision of labor
medium of exchangemedium of exchangebarterbarter
moneymoney
Five Fundamental Questionseconomic costsFive Fundamental Questionseconomic costs
normal profiteconomic profitnormal profiteconomic profit
expanding industrydeclining industryexpanding industrydeclining industry
consumer sovereigntydollar votesconsumer sovereigntydollar votes
derived demandguiding function of pricesderived demandguiding function of prices
“invisible hand“invisible hand””
