6 Market Economy

The Market EconomyUtility, Preferences, Profits

and Incentives

Entrance Ticket

•What is the bestway to allocatescarce resources?

Coke and EastGermany

Rich vs. Poor

Normal Goods vs. InferiorGoods

• As incomeincreases,consumptionincreases.

• As incomeincreases,consumptiondecreases.

Is it fair for those of us who livecomfortably to impose ourpreferences on individuals in thedeveloping world?

Why aren’t these menselling car insurance?

Utility

• People act to increase their utility atall times.

• Why is this not the same as beingselfish?

The Power of Markets

Markets are amoral

Communism

Command Economy

Markets are Self-Correcting

Prices Transmit Information

• How do prices transmit information?• What happens when demand goes up

for a product? What does that tellthe producer?

• What happens to the prices oforanges in Ohio when a hurricanehits Florida? Why?

• What happens to the price of lumberand other construction equipment inFlorida during an active hurricaneseason?

The Circular Flow Model

Every Transaction BenefitsEach Party

The Pillars of Free Enterprise

• Private property• Specialization• Voluntary exchange• The price system• Market competition• Entrepreneurship