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 ebay Two types of markets  Product markets  Factor markets monster 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 serfs 700 A.D. to 1400 A.D. Mercantilism Government control—favoritism The selling of America Industrial Revolution Technology and machines Growth of Large businesses Market Economies Individual ownership of factors of production Consumer sovereignty

2-8 Economic Growth In the Past Two Thousand Years $6,000 $5,000 $4,000 $3,000 $2,000 $1, Per capita income (in 1990 dollars) 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 NumbersBy 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 (B uying 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