Introduction to
Economics:
Social Issues
and Economic
Thinking
Wendy A . Stock
CHAPTER 8
THE POWER AND LIMITS OF
MARKETS
Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: ©Anna Zielinska/iStockphoto
Po w e r Po i n t
Prepared by
Z . Pa n
AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
 Describe the resource
allocation and
resource ownership
decisions facing
societies
 Classify the basic
types of economic
systems
 Describe the
differences in types of
ownership of
resources
Copyright © 2013 John Wiley & Sons, Inc.
 Describe the
differences in types
of decision making
about resource
allocation
 Evaluate the
tradeoffs between
efficiency and equity;
security and liberty
 Understand the
concept of market
failure
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RESOURCE ALLOCATION AND OWNERSHIP
DECISIONS
 The resource allocation decisions of a
society determine how the resources are
shared among society’s citizens.
The resource ownership decisions of a
society determine the property rights over
the resources in a society.
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RESOURCE ALLOCATION SYSTEMS
 Command Systems use governmental
regulation or central planning to allocate
resources.
 Market Systems use decentralized
interactions between buyers and sellers to
allocate resources.
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4
RESOURCE OWNERSHIP SYSTEMS
 Socialist Systems use public property
ownership.
 Capitalist Systems use private property
ownership.
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T YPES OF ECONOMIC SYSTEMS
 Market Capitalism is an economic system that
uses private property ownership and private
resource allocation decisions.
 Command Socialism is an economic system that
uses public property ownership and public resource
allocation decisions.
 Market Socialism is an economic system that uses
public property ownership and private resource
allocation decisions.
 Command Capitalism is an economic system that
uses private property ownership and public
resource allocation decisions.
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T YPES OF ECONOMIC SYSTEMS
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JUDGING ALTERNATIVE ECONOMIC
SYSTEMS
Efficiency
 Market capitalist systems are quite effective at
generating efficient resource allocations.
 The Invisible Hand is the self-regulating
mechanism of market systems that generates
allocation of resources based on self-interest,
competition, and comparative advantage.
 Command socialist systems are not as well
suited to generate economic efficiency.
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8
JUDGING ALTERNATIVE ECONOMIC
SYSTEMS
Equity
 Market capitalist systems are unlikely to
produce equitable results.
 Command socialist economic systems are
more likely than market capitalist systems to
achieve an equitable resource allocation.
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9
JUDGING ALTERNATIVE ECONOMIC
SYSTEMS
Liberty (Individual Freedom)
Because they rely on individual actors and
individual decision-making, market based
systems tend to generate more personal liberty
than do command-based systems. Similarly,
because they rely on private rather than public
property, capitalist systems tend to provide more
liberty than do socialist systems.
Copyright © 2013 John Wiley & Sons, Inc.
10
JUDGING ALTERNATIVE ECONOMIC
SYSTEMS
Security
Because command socialist economic systems
tend to be more equitable, and because
obtaining that equity involves redistribution of
income from some groups to others through
taxes or other policies, command socialist
economic systems generate more economic
security than do market capitalist economic
systems.
Copyright © 2013 John Wiley & Sons, Inc.
11
MARKET FAILURE
Market Failure - When the market generates an
inefficient allocation of goods or services.
 Monopolies
 Public Goods
 Externalities
 Imperfect Information
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MARKET FAILURE
Monopolies
A monopoly is a market with only one seller of a
good or service.
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13
MARKET FAILURE
Public Goods
A public good is one where the seller cannot
exclude nonbuyers from using it.
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MARKET FAILURE
Externalities
Externalities are costs or benefits of a trade that
are imposed on people outside the trade.
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15
MARKET FAILURE
Imperfect Information
Imperfect information occurs when the full costs
or benefits of a trade are not known to all of the
parties engaged in the trade.
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QUESTIONS/DISCUSSIONS
China and many of the countries in
Central and Eastern Europe are classified
as “transition economies” because they
are in the process of moving from
centrally planned, command socialist
economic systems toward market
capitalist systems.
What kinds of changes do you think take
place for individuals and policy makers
during this process?.
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KEY CONCEPTS
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Resource allocation
Resource ownership
Command system
Market system
Socialist system
Capitalist system
Market capitalism
Command socialism
Copyright © 2013 John Wiley & Sons, Inc.
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Market socialism
Command capitalism
Invisible hand
Market failure
Monopoly
Public good
Externalities
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