Chapter 2 pt 2 Flashcards
Capitalism characteristics
decentralized decision making
free markets determine prices, wages, allocation
strong emphasis on private property rights
factors of production owned by firms or individuals
incentives created by capitalism
profit motive because the incentive to work hard and keep what you earn
people work, invent, research
economic result of capitalism
economic growth, technological advancements, higher standards of living, low levels of government corruption
capitalism historically affect
it lasts the longest of any so-far invented economic system because it creates incentives that result in growth
importance of property rights: Zimbabwe example
farmland expropriation by government
if you take away property rights, your most productive inputs will flee
more government programs will mean
higher taxes for everyone
we may want a safety net for vulnerable populations, but we don’t want to
disincentivize work and individual effort
capitalism approach to higher education and healthcare
pay for college
pay most of healthcare through private insurance
social democracy approach to higher education and healthcare
college is “free” but paid by taxes
medical care is “free” but paid by taxes
key lesson between capitalism and social democracy
there are always tradeoffs
main difference between capitalism and socialism
extent to which the government controls the economy
central planning
government decides what to do with resources
citizens may or may not have a say in this
spectrum of economic systems
(on pg 31)
most countries are in between social democracy and pure capitalism
people say capitalism operates on greed but in communism
people are poor, but the leaders are very wealthy
capitalism has one common complaint
inequality- some have more, that isn’t “fair”
the word fair is
a normative term
inequality in us capitalism is not because our poor are extremely poor
because our rich are very rich
wealth distribution
communism: party leaders are the only ones over minimum acceptable standard of living
usa: most over
usa is not pure captalism
mixed economic system
7 significant welfare programs
- supplemental security income (SSI)
- medicaid
- supplemental nutrition assistance program (SNAP)
- child’s health insurance program (CHIP)
- temporary assistance for needy families (TANF)
- housing assistance
- earned income tax credit (EITC)
unemployment insurance is ran by each state but some programs provide
vouchers, discounts, cash payments
purpose of welfare programs
safety net and to take care of most vulnerable in society
ex. children, elderly, poor
disagreements about welfare programs
size and scope of program costs?
us the potential for fraud or bad intentions?
Poorly designed incentives could include
- benefits that disappear too quickly under certain conditions, such as getting a job or reaching certain income
- benefits that are too large or long lasting
ex. covid unemployment benefits
goal of welfare programs
we want people to provide for themselves if at all possible. welfare can help you on your feet, but not become your feet
Better designed incentives
proper amount of time and benefits, temporary, gradual phase-out of benefits, earned income tax credit
person responsibility and work opportunity reconciliation act (welfare reform)
goal was to reduce long term dependency on welfare for families and instead change the program into a “welfare to work” program
milton friedman advocated for
negative income tax at the lowest levels of income to incentivize people to work
universal basic income (UBI)
the concept of giving all citizens )not households) of a country a certain amount of money each year. there are NO RESTRICTIONS on what the money can be used for. the amount of money is the same for all people and DOES NOT DEPEND ON OTHER INCOME OR HOURS WORKED
why are some free market oriented economists are in favor of UBI over other social welfare programs?
still provides safety net, doesn’t have a marginal effect on work, you still have incentives to work and earn money
small example of UBI in usa
alaska permanent fund (1976), which pays about $1,600-$2,000 to each person yearly
why are market economies desired?
they are much more efficient than centrally planned economies in 2 ways
2 ways market economies are more efficient
- product efficiency
- allocative efficiency
product efficiency
a good or service is produced at the lowest possible cost. often a result of competition among firms
allocative effieceny
occurs in the economy when production is in accordance with consumer preferences; all goods or services are produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
-equilibrium where supply=demand
-markets more towards that outcome
when trade happens,
buyers and sellers both benefit
resources flow towards highest valued use
markets promote efficiency, but
may not guarantee it…
time lags
may take time to discover best production methods or have sufficient competition
imperfect information
not all economic actors may be aware of all possible products, prices, and markets
externalities (your activities harm me)
this can produce unaccounted costs lower efficiency
government actions
trade restrictions, regulations, laws, and policies may prevent exchange and efficiency
there is often a trade-off between efficiency and equity:
“solution” to that tradeoff depends on your personal and political beliefs
market
a group of buyers and sellers of a good and the arrangements by which they come together to trade
product market
market for goods and services
you buy food, clothing, electronics, healthcare
factor market
markets for the factors of production
-land, labor, physical capital, human capital, entrepreneurial ability
you sell your labor in the
factor market
household
consists of all individuals in a home. sometimes we’ll talk about the choices of individuals or households
firms
the suppliers of goods and services
what model we have for two markets (product and factor) and two groups of participants (households and firms)
circular flow diagram
circular flow diagram
income and resources are always opposite
households buy in
product market
households sell in
factor market
firms sell in
product market
firms buy in
factor market
what market actions and participants are missing from the simple diagram?
financial system: banks and lending
international trade
how are prices of the goods determined?
on the us government only sets or regulates 10-20% of prices and GOODS
most prices determined by markets
in a market-based economy, prices are determined by the forced of
supply (think of selling) and demand (think of buying)
firms in a free market
have a monetary profit incentive to be efficient and do well
households in a free market
self-interest rational
goal: make themselves as best off as possible
smith (and thousands of economists after him) show
provide for everyone more efficiently than central government planning and regulation
for the market to function efficiently, prices must be
flexible
adam smith: the market acts as if it were guided by an
“invisible hands”
firms and consumers respond to changes in prices other market conditions
prices:
provide info about relative
act as a signal to individuals and business
ration scarce goods
rationing function of prices
synchronization of decisions of buyers and sellers that leads to equilibrium
prices ration goods to those who are willing to pay those prices
prices: one method of allocation scarce goods
market will eventually reach equilibrium if there is no friction or legal restrictions
price rationing
leads to most efficient use of available resources
all gains from mutually beneficial trade are captured
copyrights and patents:
in certain case, I can’t steal your ideas, your intellectual property
purpose of patents and copyrights?
incentives for innovation
we want to reward creative works and technologies
thus can spur economic growth
other benefits of free markets
more individual autonomy
more labor mobility
ideally, increased equality of opportunity
there are many types of markets we will see, and all will have buyers and sellers
who are buyers and sellers?
what is being traded?
there will be ___ prices and quantities
equilibrium
there could be movements or shifts, depending on which variables change
study what event or policy causes the change
