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
3-7
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
3-16
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
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