The Economic Organization Of Society

1. The Economic Organization Of Society Chapter 2

2. Laugher Curve Q. How many Marxists does it take to screw in a light bulb? A. None. The bulb contains within itself the seeds of its own revolution.

3. Introduction • An economic system must coordinate individuals' wants and desires.

4. Introduction • An economic system has to solve three coordination problems: • What, and how much, to produce. • How to produce it. • For whom to produce it.

5. Introduction • Every economy faces the problem of how to make individuals do what society wants them to do.

6. Introduction • Sometimes the goals of society and individuals conflict. • An example is the NIMBY (Not In My Back Yard) phenomenon. • NIMBY was a 1990s mindset in which individuals approve of a project so long as it is placed somewhere else.

7. Introduction • One problem every economy faces is what to do with individuals who want to do what "society" does not want them to do.

8. Introduction • An economic system must give the incentive to do those things that alleviate scarcity—produce more and consume less.

9. Introduction • The coordination problems faced by society are immense.

10. Introduction • The two main economic systems of the past 50 years, capitalism and socialism, answer these coordination problems differently.

11. Capitalism • Capitalism is an economic system based upon private property and the market in which, in principle, individuals decide how, what, and for whom to produce.

12. Under Capitalism: • Individuals are encouraged to follow their own self-interest, while market forces of supply and demand are relied upon to coordinate those individual pursuits.

13. Under Capitalism: • Distribution of goods is to each according to his or her ability, effort, or inherited property.

14. Under Capitalism: • Government must allocate and defend private property rights. • Private property rights – the control a private individual or firm has over and asset or a right.

15. Reliance on the Market • Markets work through a system of rewards and payments. • Individuals are free to do whatever they want as long as it is legal.

16. Reliance on the Market • Prices coordinate individuals' wants. • If there is not enough of something, its price goes up. • If there is too much, price goes down.

17. What’s Good About the Market? • Most economists believe the market is a good way to coordinate individuals' needs.

18. What’s Good About the Market? • The primary debate among economists is about how markets should be structured, and whether they should be modified and adjusted by government regulation.

19. Socialism • Socialism is, in theory, an economic system based on individuals’ good will toward others, not on their own self-interest. • In principle, society decides what, how, and for whom to produce.

20. Socialism in Theory • Socialism is an economic system that tries to organize society in the same way as families are organized. • Everyone contributes what they can and get what they need.

21. Socialism in Theory • If individuals' inherent goodness will not make them consider the general good, government will force them.

22. Socialism in Practice • Economic systems based on upon people's goodwill have tended to break down.

23. Socialism in Practice • Socialism in practice is often called Soviet-style socialism. • Soviet-style socialism is an economic system that uses administrative control or central planning to solve the coordination problems what, how, and for whom.

24. Types of Economic Systems of the Past • Feudalism dominated the Western world from about the 8th to the 15th century. • Feudalism is an economic system in which traditions rule.

25. Evolving Economic Systems • Feudalism gave way to mechantilism. • Mechantilism is an economic system in which government determines the what, how, and for whom decisions by doling out the rights to undertake certain economic decisions.

26. Evolving Economic Systems • Mercantilism gave way to the Industrial Revolution. • Industrial revolution – a time when technology and machines rapidly modernized industrial production and mass produced goods replaced handmade goods.

27. Evolving Economic Systems • Capitalism evolved from the Industrial Revolution.

28. Evolving Economic Systems • Some economists prefer to call the system that evolved from mercantilism the market economic system—an economic system that relies on markets to coordinate economic activities.

29. The Need for Coordination in an Economic System • Every economic needs coordination – even capitalism.

30. The Need for Coordination in an Economic System • In his 1776 classic, Wealth of Nations, Adam Smith explained how markets could coordinate the economy without the active involvement of government.

31. The Need for Coordination in an Economic System • Markets coordinate economic activity by using the price mechanism to direct individuals' self-interest into society's interest.

32. Evolutionary Changes Within Systems • Both capitalism and socialism are constantly evolving with changes in social customs, political forces, and the strength of markets.

33. Evolutionary Changes Within Systems • A purer form of capitalism evolved into welfare capitalism—an economic system in which the market operates but government regulates markets significantly.

34. Evolutionary Changes Within Systems • The opposite took place in socialist nations—socialism integrated capitalist institutions into its existing institutions.

35. A Blurring of the Distinction Between Capitalism and Socialism • Recent events point to a blending of capitalism and socialism.

36. A Blurring of the Distinction Between Capitalism and Socialism • If this trend continues, the 21st century will see the emergence of a single general type of economic system, a blended capitalist-socialist system.

37. The Production Possibilities Curve and Economic Reasoning • The choices made by society are often presented in terms of a production possibility curve.

38. The Production Possibilities Curve and Economic Reasoning • The production possibilities curve shows the trade-offs among choices we make.

39. The Production Possibility Table • A production possibility table lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs.

40. The Production Possibility Table • Three things to know to understand a production possibility table: • Opportunity cost– every decision has a cost in forgone opportunities. • Output – an output is simply a result of an activity. • Input – an input is what you what you put into a production process to achieve an output.

41. The Production Possibility Curve • A production possibility curve measures the maximum combination of outputs that can be achieved from a given number of inputs. • It slopes downward from left to right.

42. The Production Possibility Curve • The production possibility curve not only represents the opportunity cost concept, it also measures the opportunity cost.

43. The Production Possibility Curve • The production possibility curve demonstrates that: • There is a limit to what you can achieve, given the existing institutions, resources, and technology. • Every choice made has an opportunity cost—you can get more of something only by giving up something else.

44. 20 hours of economics 0 hours of history A 100 B 88 Economics grade C 70 20 hours of history 0 hours of economics D 46 E 40 58 66 78 94 98 History grade The Production Possibility Curve Hours of study Grade in Hours of study Grade in in history history in economics economics 20 98 0 40 19 96 1 43 18 94 2 46 17 92 3 49 16 90 4 52 15 88 5 55 14 86 6 58 13 84 7 61 12 82 8 64 11 80 9 67 10 78 10 70 9 76 1 1 73 8 74 12 76 7 72 13 79 6 70 14 82 5 68 15 85 4 66 16 88 3 64 17 91 2 62 18 94 1 60 19 97 0 58 20 100

45. Increasing Marginal Opportunity Cost • The production possibility curve is generally bowed outward since some resources are better suited for the production of some goods.

46. Increasing Marginal Opportunity Cost • The concept of comparative advantage explains why opportunity costs increase as the consumption of a good increases. • Some resources are better suited for the production of some goods than to the production of other goods.

47. Y 10 If the slope of the production curve is -2 at A, the opportunity cost of 1X is 2Y. 9 8 A 2Y 7 . 6 5 1X 4 3 2 1 0 1 2 3 4 5 6 7 8 9 X Increasing Marginal Opportunity Cost

48. Increasing Marginal Opportunity Cost • The principle of increasing opportunity cost states that opportunity costs increase the more you concentrate on an activity. • In order to get more of something, one must give up ever-increasing quantities of something else.

49. Increasing Marginal Opportunity Cost % of resources % of resources devoted to devoted to production production Pounds Number of guns of butter of butter Row of guns 0 0 100 15 A 20 4 80 14 B 40 7 60 12 C 60 9 40 9 D 80 1 1 20 5 E 100 12 0 0 F

50. 1 pound of butter 2 pounds of butter 5 pounds of butter 4 guns 3 guns 1 gun Increasing Marginal Opportunity Cost A 15 B 14 C 12 D 9 Butter E 5 F 4 7 9 11 12 0 Guns