Economic system in market economy

1. Economic system in market economy

2. Topics:

1.
What is an economic system? Definition and meaning
2.
Three main economic systems
3.
What is a Market Economy?
4.
Types of Markets

3. References:

• Alberto Bisin (2011) Introduction to economic analysis, Dept. of Economics NYU
• William A. McEachern (2006) Economics: A Contemporary Introduction, University of
Connecticut
• Carl Menger (2007) Principles of economics, Ludwig von Mises Institute
• The economic problem and economic system
https://faculty.etsu.edu/hipples/ProbSys.htm

4. KEY TAKEAWAYS:

• An economic system, or economic order, is a system of production, resource
allocation and distribution of goods and services within a society or a given
geographic area.
• In a market economy most economic decision making is done through voluntary
transactions according to the laws of supply and demand.
• A market economy is fundamentally one where entrepreneurs are free to control
and co-ordinate productive resources in order to pursue profit by creating
outputs that are more valuable than the inputs they use up, and free to fail and go
out of business if they do not.
• Economists broadly agree that more market-oriented economies produce better
economic outcomes, but differ on the precise balance between markets and
central planning that is best to provide stability, equity, and long term benefits.

5. 1. What is an economic system? Definition and meaning

• An economic system is an organized way in which a country allocates resources
and distributes goods and services across the whole nation or a given geographic
area. It is includes the combination of several institutions, entities, agencies,
decision-making processes and patterns of consumption that make up the
economic structure of a specific community. Hence it is a type of social system.
• An economic system defines how all the entities in an economy interact.
Defining them today is much more complicated than it used to be. Ancient
systems were relatively simple – trade was carried out using barter and there
were very few treaties and rules of engagement.

6.

• An economic system is the combination of the various agencies and
entities that provide the economic structure that defines the social
community. These agencies are joined by lines of trade and
exchange goods. Many different objectives may be seen as
desirable for an economy, like efficiency, growth, liberty, and
equality. An economic system may involve production, allocation
of economic inputs, distribution of economic outputs, landlords
and land availability, households (earnings and expenditure
consumption of goods and services in an economy), financial
institutions, firms, and the government.

7.

• Alternatively, an economic system is the set of principles by which
problems of economics are addressed, such as the economic
problem of scarcity through allocation of finite productive
resources.
• The scarcity problem, for example, requires answers to basic
questions, such as:
What to produce?
How to produce it?
Who gets what is produced?

8.

• Examples of contemporary economic systems include:
• Planned systems
• Free market systems
• Mixed economies
• Today the world largely operates under a global economic system
based on the free market mode of production.

9.

10. Economic systems today are complex

• In ancient societies, people only exchanged what they
had for what they wanted or needed. Today, however, in
monetary economies, the setting is much more
sophisticated.
• We currently live in a society where massive corporations
have a strong influence on how business is done.
Agreements and treaties are negotiated and signed every
day, and governments have made many laws concerning
trade, which means we require a much more
comprehensive definition of what an economic system is.

11.

• Different Types describes an economic system as an organized
manner in which a particular government has chosen to allocate its
country’s goods and services.
• Systems in today’s economies are about much more than simple
trade. They define our society’s values and its political structure.
• Every economic system looks at three or four basic questions:
What to produce.
How to produce and how much.
Who receives production’s output.
How change is going to be effected and accommodated.

12.

• The structure of each economic system seeks to answer these three or four questions. The
system sets the rules of play for all the players in an economy, and defines how they can
interact with one another.
• The study of economic systems looks at how their various components are interlinked, how
information flows between them, and their social relations, including the structure of
management and property rights.
• The analysis of economic systems used to focus on two extremes – planned and market
economies, and on the differences between socialism and capitalism.
• Today the classification of economic systems has expanded to include other models and
topics that do not conform to those traditional extremes. Globally, the currently dominant
form of economic organization is based on varying versions of a market-oriented mixed
economy.

13. 2. Three main economic systems

• In this world there are three main types of
economic systems. Governments and their leaders
claim to have their own peculiar systems, but they
are all basically mixed economies. Economic
systems can be basically classed into three
categories.

14.

• Market economy: here prices are determined by levels of
supply and demand, instead of central and or local
government. Market forces determine what is produced,
how much is produced, how it is distributed, plus the prices
of goods and services.
• All decisions regarding investment and salaries are also
driven by market forces in a market economy.
• In a market economy, the government plays a minor role
and only lays down the rules so that businesses can thrive.
An outdated word for this type of economy is Capitalism.

15. The Market Economic System

• A market economic system is based on market
freedom. In other words, market forces control the
economy. What are market forces? Consumers
deciding whether to buy a good at a certain price,
to wait before buying it or to never buy is a
market force. Businesses pricing products to
create maximum profit, taking into account
consumer demand, is another market force.

16.

• Therefore, a pure market economic system will
rely fully on consumer and business behavior for
economic planning. Businesses will produce more
when consumers buy more, consumers will save
up when prices get too high.

17.

• However, there are no examples of pure market economies as almost every economy
involves some degree of regulation to distribute economic resources. Regulation also
prevents consumers and business from suffering from abusive behavior by their
peers, and from market-distorting tactics taking hold. Yet many economic systems
are so lightly regulated that they are effectively market economies.
• In theory, a market economy allows for a lot of economic growth because markets are
most efficient at allocating economic resources. It’s easy to argue that the highest
economic growth is indeed under a market system where government influence is
minimal.

18.

• But there is a downside to the market economy. As the free
market economy growths, individuals and corporate
entities can amass a lot of wealth, power and control of the
economic system. Imagine how much control Google and
Amazon have over the US economy, for example. In turn,
this means that the market economy becomes less
efficient. That said, this is where governments can
intervene to restore economic efficiency.

19. Free Market System

• The economic system in which most businesses are
owned and operated by individuals is the free market
system, also known as ” capitalism. ”
• In a free market, competition dictates how goods and
services will be allocated. Business is conducted with
only limited government involvement. The economies
of the United States and other countries, such as Japan,
are based on capitalism.

20. In a capitalist economic system:

• Production is carried out to maximize private profit.
• Decisions regarding investment and the use of the means of
production are determined by competing business owners in
the marketplace.
• Production takes place within the process of capital
accumulation.
• The means of production are owned primarily by private
enterprises and decisions regarding production and
investment determined by private owners in capital markets.

21.

Capitalist systems range from laissez-faire
(Laissez=passer), with minimal government
regulation and state enterprise, to regulated and
social market systems, with the stated aim of
ensuring social justice and a more equitable
distribution of wealth or ameliorating market
failures.

22. World map showing communist states: Formerly titled socialist states, led by communists (whether that be in title or in fact),

are represented in orange, currently
titled socialist states are represented in red. It is of heavy dispute whether there are
any actual socialist or genuinely communist led states in the world today.

23. 3. What is a Market Economy?

• A market economy is an economic system in which
economic decisions and the pricing of goods and services
are guided by the interactions of a country's individual
citizens and businesses.
• There may be some government intervention or central
planning, but usually this term refers to an economy that
is more market oriented in general.

24. What Is A Market Economy?

• ●An economic system where prices are
determined by unrestricted competition between
privately owned businesses.
• ●In this form of economy economic decisions are
based solely on aggregate interactions of a
country’s individual citizens.

25. How Did The Market Economy Begin?

• ●There’s no single individual who began this form
of economy, “the history of the market economy is
one of constant, unintentional (but not
interrupted) progress.” Due to strict adherents,
there is barely any government interaction.

26. How Does A Market Economy Work?

• ●Market economies work by relying on a
productive market in order to sell goods and
services.

27. How Does A Market Economy Produce Products?

• ●Market economies produce products in the most
efficient way possible, and the products produced
depend upon the supply and demand.

28.

Impacts of Supply and Demand on Businesses
• The mechanisms of supply and demand in a competitive
market determine the price and quantities of products.
The Basics of Supply and Demand
• In a market characterized by perfect competition, price is
determined through the mechanisms of supply and
demand. Prices are influenced both by the supply of
products from sellers and by the demand for products by
buyers.

29.

• Demand and the Demand Curve
• Demand is the quantity of a product that buyers are willing to purchase at various prices.
• The quantity of a product that people are willing to buy depends on its price. You’re
typically willing to buy less of a product when prices rise and more of a product when prices
fall. Generally speaking, we find products more attractive at lower prices, and we buy more
at lower prices because our income goes further. Using this logic, we can construct a demand
curve that shows the quantity of a product that will be demanded at different prices.
• The red curve in the diagram represents the daily price and quantity of apples sold by
farmers at a local market. Note that as the price of apples goes down, buyers’ demand goes
up. Thus, if a pound of apples sells for $0.80, buyers will be willing to purchase only 1,500
pounds per day. But if apples cost only $0.60 a pound, buyers will be willing to purchase
2,000 pounds. At $0.40 a pound, buyers will be willing to purchase 2,500 pounds.

30.

• Supply and the Supply Curve
• Supply is the quantity of a product that sellers are willing to sell at various prices.
• The quantity of a product that a business is willing to sell depends on its price.
Businesses are more willing to sell a product when the price rises and less willing to sell
it when prices fall. This fact makes sense: Businesses are set up to make profits, and
there are larger profits to be made when prices are high. Now, we can construct a
supply curve that shows the quantity of apples that farmers would be willing to sell at
different prices, regardless of demand.
• The supply curve goes in the opposite direction from the demand curve: As prices rise,
the quantity of apples that farmers are willing to sell also goes up.
• The supply curve shows that farmers are willing to sell only a 1,000 pounds of apples
when the price is $0.40 a pound, 2,000 pounds when the price is $0.60, and 3,000 pounds
when the price is $0.80.

31.

Equilibrium Price
• We can now see how the market mechanism works under
perfect competition.
• We do this by plotting both the supply curve and the
demand curve on one graph. The point at which the two
curves intersect is the equilibrium price. At this point,
buyers’ demand for apples and sellers’ supply of apples is
in equilibrium.

32.

33. How is the market price determined?

• This lesson will explain what the market price is and also walk
you through an example of determining the equilibrium price.
• Definition
• The equilibrium price is the market price where the quantity of
goods supplied is equal to the quantity of goods demanded. This
is the point at which the demand and supply curves in the
market intersect.
• To determine the equilibrium price, you have to figure out at
what price the demand and supply curves intersect.

34.

• The supply and demand curves intersect at P* and Q*, which are
the equilibrium price and quantity.
• It's one thing to be able to identify the equilibrium price on a
graph, but you should also be comfortable figuring out the price
algebraically. Here are the supply and demand curve formulas for
this example: Qd = 50 - 5P and Qs = 5 + 10P.

35.

• The supply and demand curves intersect at the price of $0.60
and quantity of 2,000 pounds. Thus, $0.60 is the equilibrium
price: At this price, the quantity of apples demanded by
buyers equals the quantity of apples that farmers are willing
to supply.
• If a farmer tries to charge more than $0.60 for a pound of
apples, he won’t sell very many, and his profits will go down.
If, on the other hand, a farmer tries to charge less than the
equilibrium price of $0.60 a pound, he will sell more apples
but his profit per pound will be less than at the equilibrium
price.

36. equilibrium price and quantity (Qs=Qd)

37.   4. Types of Markets

4. Types of Markets
What do you mean by market in economics?
• In mainstream economics, the concept of a market is any structure that allows
buyers and sellers to exchange any type of goods, services and information. The
exchange of goods or services, with or without money, is a transaction.
What is market and its types?
• There are four basic types of market structures: perfect competition, imperfect
competition, oligopoly, and monopoly. ... Meanwhile, monopolistic competition
refers to a market structure, where a large number of small firms compete against
each other with differentiated products.

38.

What are pricing theories?
• The theory of price, or price theory, is a microeconomic principle that uses the
concept of supply and demand to determine the appropriate price point for a
good or service. ... The concept allows for price adjustments as market
conditions change. For example, suppose that market forces determine that a
widget costs $5.
Who developed the theory of price?
• Historical development of theory
• Historically, the best-known proponent of such theories is probably Adam
Smith. Piero Sraffa, in his introduction to the first volume of the "Collected
Works of David Ricardo", referred to Smith's "adding-up" theory. Smith
contrasted natural prices with market price.

39.

What are the 3 types of market?
• A set up where two or more parties engage in exchange of goods, services and information
is called a market. Ideally a market is a place where two or more parties are involved in
buying and selling.
• The two parties involved in a transaction are called seller and buyer.
• The seller sells goods and services to the buyer in exchange of money. There has to be more
than one buyer and seller for the market to be competitive.
• Monopoly - Monopoly is a condition where there is a single seller and many buyers at the
market place. In such a condition, the seller has a monopoly with no competition from others
and has complete control over the products and services.
• In a monopoly market, the seller decides the price of the product or service and can change it
on his own.
• Monopsony - A market form where there are many sellers but a single buyer is called
monopsony. In such a set up, since there is a single buyer against many sellers; the buyer can
exert his control on the sellers. The buyer in such a form has an upper edge over the sellers.

40.

Supply (Seller)
Lots of (More than)
1
2
Many (a lot of)
1
Monopoly
(bilateral)
Duopoly
monopsony
Oligopoly
monopsony
Perfect monopsony
2
Monopoly
duopsony
Duopoly
(bilateral)
Oligopoly
duopsony
Perfect
duopsony
Many (a lot of)
Monopoly
oligopsony
Duopoly
Oligopsony
Oligopoly
(bilateral)
Perfect
oligopsony
Lots of (More than)
Perfect
monopoly
Perfect
duopoly
Perfect
oligopoly
Pure and perfect
competition
Demand (Buyer)

41.

• Physical Markets - Physical market is a set up where buyers can physically
meet the sellers and purchase the desired merchandise from them in
exchange of money. Shopping malls, department stores, retail stores are
examples of physical markets.
• Non Physical Markets/Virtual markets - In such markets, buyers purchase
goods and services through internet. In such a market the buyers and sellers
do not meet or interact physically, instead the transaction is done through
internet. Examples - Rediff shopping, eBay etc.
• Auction Market - In an auction market the seller sells his goods to one who is
the highest bidder.

42.

• Market for Intermediate Goods - Such markets sell raw materials (goods)
required for the final production of other goods.
• Black Market - A black market is a setup where illegal goods like drugs and
weapons are sold.
• Knowledge Market - Knowledge market is a set up which deals in the
exchange of information and knowledge based products.
• Financial Market - Market dealing with the exchange of liquid assets
(money) is called a financial market.

43.

• Financial markets are of following types:
• Stock Market - A form of market where sellers and buyers exchange shares is called a stock
market.
• Bond Market - A market place where buyers and sellers are engaged in the exchange of debt
securities, usually in the form of bonds is called a bond market. A bond is a contract signed by
both the parties where one party promises to return money with interest at fixed intervals.
• Foreign Exchange Market - In such type of market, parties are involved in trading of currency. In
a foreign exchange market (also called currency market), one party exchanges one country’s
currency with equivalent quantity of another currency.
• Predictive Markets - Predictive market is a set up where exchange of good or service takes place
for future. The buyer benefits when the market goes up and is at a loss when the market crashes.
• Market Size
• The market size is directly proportional to two factors:
• Number of sellers and Buyers
• Total money involved annually

44. How do you define a market?

45.

• 2.1. Market definition is not an end in itself but a key step in identifying
the competitive constraints acting on a supplier of a given product or
service. Market definition provides a framework for competition
analysis. For example, market shares can be calculated only after the
market has been defined and, when considering the potential for new
entry, it is necessary to identify the market that might be entered.
Market definition is usually the first step in the assessment of market
power.

46.

• 2.2. Therefore, market definition is important in the process of establishing
whether or not particular agreements or conduct fall within the scope of the
competition rules:
• • Article 81 and section 2(1) of the Act (the Chapter I prohibition) apply
only to agreements which have as their object or effect an 'appreciable'
prevention, restriction or distortion of competition (see the competition law
guideline Agreements and concerted practices (OFT401)). The appreciability
test usually requires definition of a relevant market and demonstration that
the agreement would have an appreciable effect on competition within that
market6 , and Article 82 and section 18(1) of the Act (the Chapter II
prohibition) apply only to dominant undertakings7 . The OFT would not
consider an undertaking to be dominant unless that undertaking had
substantial market power.

47.

• The definition of the relevant market(s) is a necessary first step in assessing whether an
undertaking is dominant.
• 2.3. In addition to its value in providing a framework for competition analysis, an
appropriately defined relevant market may provide information that allows an
investigation to be closed at an early stage. For analysis under Article 81 and/or the
Chapter I prohibition, where an agreement involves undertakings whose combined
share of the relevant market is low, the agreement is unlikely to raise competition
concerns unless it contains price fixing, market sharing or bid rigging restrictions8 .
Market definition is also important when assessing whether an undertaking's market
share is below market share thresholds set out in certain block exemptions.
• 2.4. For analysis under Article 82 and/or the Chapter II prohibition, undertakings with
low market shares will usually not possess market power individually. Therefore, an
investigation of an individual undertaking whose market share is low can normally be
closed at an early stage9 .

48.

• Thank you very much!!!