Modern Mixed Economy

Chapter II Economics 19th ed., Samuelson & Nordhaus

Three Main Types of Economies
• 1. Centrally-Planned/Command Economies
• 2. Mixed Economies
• 3. Market Economies
The Market
The Market Mechanism
• The Market?
• ‘A market is a mechanism (or a space) through which buyers and sellers
interact to determine prices and exchange goods, services and assets’e.g.
market for oranges, labor market, stock market (Samuelson et.al 2009).
• This is where the economic problems (for whom, how, and what) is
coordinated and solved.
• The central role of market is to determine prices or how much one good
exchanges for another.
• The market, thru prices, also signals information throughout the economy.
What does higher price for hamburger signal to fast food chains? How about
high wage to computer engineers?
The Market Mechanism
• Market Equilibrium
• Market equilibrium is a state where demand equals supply, or that all market
forces are in a state of balance (no tendency for change).
The Market Mechanism
• How the market solve the three economic problems
• 1. What to produce- determined by dollar votes coupled with profit seeking
firms.
• 2. How to produce- firms finds way to minimize cost and maximize efficiency
which leads to adoption and development of new
technologies.
• 3. For whom- is determined by market forces on factors of production
such as labor, capital and the distribution of income among
the population etc. People who receive wages, rents,
dividends etc.
Tastes and Demand
A. Taste- determines the demand for a certain commodity (Indifference
Curve)
B. Technology-determines the production capacity in an economy (PPF)
Question: How does taste and technology determine what
kinds of goods and commodity as well as
prices exist in a market? Give examples.
Why is there no market for Nokia or pager anymore?
Why is there no market for cloned pets?
The Invisible Hand
• Invisible hand (Adam Smith)
• Question: Is private and public interest necessarily inconsistent?

• Adam Smith demonstrated how private interests can be in harmony with

public interest. Private interests leads to a public gains in a well functioning
market and perfect competition (many sellers and many buyers, perfect
information etc.).

• Example: Private interests (profits) leads to provisions of goods, innovations

and public gains.
Trade, Money, and Capital
Trade and Division of Labor
• What is Division of Labor/Specialization?
• Effects: High productivity and Innovation
• What is the relationship between Trade and Specialization?
• Specialization leads to Gains of trade
• Ex. Farmer-Fishermen
Vietnam-Philippines
Money
• Uses of Money
1. Means of and measure of unit of exchange
Example: How would you buy a pizza without money? Via
barter, but what will you exchange for a slice of pizza? What will be the
standard unit? What about other consumers who want pizza but wants
to exchange it for another good?
Money
• Money is regulated by central banks via Monetary Policy of countries
to avoid inflation or hyperinflation. ex. Post-WWII Germany.
Capital
• Physical Capital-a good that is produced to serve as an input to
produce other inputs i.e. machineries, buildings etc.

• Relationship between savings and capital, and growth.

• Savings (lower consumption now) Capital Formation (investment)Higher
Future Output/Expansion in PPF
• Same applies for Human Capital
Capital
• Capitalism and Private Property
-capital is privately owned in most market economies.
-the ability of people to profit (rents) through ownership of capital gives this
systems their name “capitalism”.(as opposed to feudalism, slave economies
etc.)
The Visible Hand of the
Government
The Visible Hand of the Government
• Perfect competition works for public gain if all conditions are met i.e.
perfect information, no externality, many sellers etc.

• But satisfying all this condition in reality is rare.

• Solution: Government Intervention
The Visible Hand of the Government
• Three main economic functions of Government
• 1. Government increase efficiency by promoting competition, curbing
externalities like pollution, and providing public goods. (ex. Oil industry
collusions)
• 2. Promoting equity thru redistribution schemes like taxation.
• 3. Foster macroeconomic stability and growth (unemployment, inflation, use
of fiscal policy and monetary policy)
The Visible Hand of the Government
• Increase of efficiency and promotion of competition
• How can perfect competition fail?
• One firm is big enough to affect prices (monopolies and oligopolies) (leads to inefficiency
and higher prices).
• Externalities or involuntary imposition of cost (or benefit)outside the marketplace ex.
Pollution or Technological Innovation.
The Visible Hand of the Government
• Provisions of Public Goods
• Non-rival and non-excludable goods
• Involves very high sunk and overhead costs that makes it unprofitable
The Visible Hand of the Government
• Taxation 
The Visible Hand of the Government
• Issues on Equity (Normative Economics)
Even under perfect competition and maximum efficiency, issues
on fairness and equity can still arise (Distribution PPF example).
Issues on Labor market and wage determinations and income
inequality.
Possible Solutions: Progressive Taxation, social benefits, healthcare
programs, transfer payments.
The Visible Hand of the Government
• Welfare State- markets +government regulation of social conditions
(health, insurance, transfers, unemployment benefits)