Economic Institutions

Adam Smith and the Invisible Hand

England in the late 1700s A nation of shopkeepers

The eccentric Adam Smith

1776: The Wealth of Nations Each person acts selfishly The result benefits society As if guided by an Invisible Hand

What did he mean?

Adam Smith and the Invisible Hand

Every individual endeavors to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain.

And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.

Markets Markets

Markets bring buyers and sellers together for exchange

Voluntary exchange benefits both parties Markets as auctions ebay

Two types of markets Product markets Factor markets monster

The Invisible Hand: Competition Types of competition

Price Advertising Product characteristic

Benefits of competition Problems of market power

The Market Answer to the Three Questions Markets and the 3 Questions

What to produce—consumer sovereignty How to produce—competition For whom to produce--ability to purchase and wants

of consumers

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The Evolution of Economic Systems Feudalism

Based on tradition--Lords and serfs700 A.D. to 1400 A.D.

MercantilismGovernment control—favoritismThe selling of America

Industrial RevolutionTechnology and machinesGrowth of Large businesses

Market EconomiesIndividual ownership of factors of productionConsumer sovereignty

2-8

Economic Growth In the Past Two Thousand Years

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

2010150010005000

Per

cap

ita in

com

e

(in

19

90

dolla

rs)

WHY? 1. Trade 2. Industrialization

Socialism and Mixed Economies Socialism

Government ownership of means of production Central Planning

Mixed Economies Both private and government ownership All modern economies exist along a spectrum

Private----X-------------X--------Government

Economic Systems and the Circular Flow of Income Households (Individuals and Families)

Buy goods and services Sell resources Objective: Personal welfare

Businesses Produce good and services Buy resources Objective: Profit

Government Buy and produce goods and services Referee Objective: Societal Welfare (?)

3-11

Economic Systems and the Circular Flow of Income

3-12

Forms of Business

Sole proprietorships (71%) Corporations (89%)

Corporations (19%)

Partnerships (10%)

Partnerships (7%)Sole proprietorships (4%)

By Numbers By Receipts

Forms of Business Ownership

SOLE PROPRIETORSHIPS Advantages

Ease of start-up No sharing Decision making

Disadvantages Expansion Unlimited Liability Management skills

Forms of Business Ownership PARTNERSHIPS

Advantages Expansion Risk sharing Management skills

Disadvantages Sharing of profits Unlimited liability Decision making

CORPORATIONS ADVANTAGES

Obtaining funds Limited liability Transfer of

ownership Management

skills DISADVANTAGES

Loss of Owner Control

Additional Taxes Regulations

Forms of Business Ownership

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E-Commerce(Buying and selling over the Internet)

B2B (Business-to- Business)Firms exchanging goods and services through online sales and auctions.

B2C (Business-to-Consumer)Firms selling goods and services to consumers through online catalogs and shopping cart software.

C2B (Consumer-to-Business)An individual offering goods and services to firms online.

C2C (Consumer-to-Consumer)Individuals buying and selling goods to one another online.

Profits and Entrepreneurs

Phil Knight Chester Carlson Frederick Smith Mary Kay Ash Bill Gates Debbie Fields Jeff Bezos Larry Page Sergey Brin