The Economic Organization Of Society pdf

© 2003 McGraw-Hill Ryerson LimitedIntroduction The two main economic systems of the past 50 years, capitalism and socialism, answer these immense coordination problems differently... © 2

Organization Of Society

Chapter 2

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Laugher Curve

In capitalism man exploits man; in

socialism it’s the other way ‘round

Abba Lerner

An economic system must coordinate individuals' wants and desires

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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.

Every economy faces the problem of

how to make individuals do what society wants them to do

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Introduction

Sometimes the goals of society and

individuals conflict

An example is the NIMBY (Not In My Back Yard) phenomenon.

NIMBY is a mindset in which individuals approve of a project so long

as it is placed somewhere else.

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Introduction

The two main economic systems of the past 50 years, capitalism and socialism, answer these immense coordination

problems differently

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

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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

Under Capitalism:

Distribution of goods is to each

according to his or her ability, effort, or inherited property

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Under Capitalism:

Government must allocate and defend private property rights

Private property rights – the control a

private individual or firm has over an asset

or a right.

Reliance on the Market

Markets work through a system of

rewards and payments

In capitalism individuals are encouraged

to follow their own self-interest

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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.

What’s Good About the

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Market?

The primary debate among economists

is about how markets should be

structured, and whether they should be modified and adjusted by government regulation

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

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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, provided it is available.

Socialism in Theory

If individuals' inherent goodness will not make them consider the general good, government will force them

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Socialism in Practice

Socialism in practice is often called

Soviet-style socialism

system that uses administrative control or central planning to solve the coordination problems what, how, and for whom.

The choices made by society are often presented in terms of a production

possibility curve

The production possibilities curve

shows the trade-offs among choices we make

The Production Possibilities Curve and Economic

Reasoning

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Table

A production possibility table lists the

maximum combination of outputs that

can be obtained from a given number of inputs

The Production Possibility

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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.

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70

46 40

58 66 78 94 98

History grade

20 hours of history

0 hours of economics

E D

C B

Increasing Marginal

Opportunity Cost

The production possibility curve is

generally bowed outward since some

resources are better suited for the

production of some goods

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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.

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Opportunity Cost

The principle of increasing opportunity

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

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12 11

14 12

4 burgers

1 DVD

Slope is steep at B

High opportunity cost of burgers.

B A

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Efficiency

In our production, we would like to have

productive efficiency—achieving as much output as possible from a given amount of inputs or resources

Any point within the production

possibility curve represents

inefficiency—getting less output from inputs which, if devoted to some other activity, would produce more output

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Efficiency

Any point outside the production

possibility curve represents something unattainable, given present resources and technology

Efficiency and Inefficiency,

A

B

Efficient points

Inefficient point

Unattainable point, given available technology, resources and labor force

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Possibility Curve

Society can produce more output if:

Technology is improved.

More resources are discovered.

Economic institutions get better at fulfilling our wants.

Shifts in the Production

Possibility Curve

An outward shift in the production

possibility curve indicates more output that can be produced with given inputs

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Neutral Technological Change

Biased Technological Change

Shifts in the Production

B

DVDs

C

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Efficiency

The production possibilities curve

focuses on productive efficiency and

Distribution and Production Efficiency

Economists often talk about efficiency

as if it means productive efficiency and achieving society's goals

In our society, more is generally preferred to less and many

policies have relatively small distributional effects.

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Production Possibility Curve

If more inputs are available for the

production of X and Y equally, the PPC

shifts out along both X and Y axes.

If fewer inputs are available for the

production of X and Y equally, the PPC

shifts in along both X and Y axes.

Examples of Shifts in the

Production Possibility Curve

If more inputs are available for good X only, the PPC shifts out on the X axis

only

If more inputs are available for good Y only, the PPC shifts out on the Y axis only.

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Production Possibility Curve

Fig 2-4, p 37

The Production Possibility

Curve and Economic Systems

The production possibility curve

presents choices in a timeless fashion but most choices are dependent on

previous choices

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Curve and Economic Systems

Sequential decisions can best be seen

a visual description of sequential

choices

The Production Possibility

Curve and Economic Systems

All decisions are made in context –

what makes sense in one context may not make sense in another

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Curve and Economic Systems

Decisions are contextual

What the production possibility curve for a particular decision looks like depends

on existing institutions

The analysis can be applied only in the institutional and historical context.

The Production Possibility

Curve and Tough Choices

The production possibility curve

represents tough choices

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Curve and Tough Choices

Politicians make promises as though

the production possibility curve did not exist or that the economy can operate outside the economy's production

possibility curve

The Production Possibility

Curve and Tough Choices

Economists continually point out that

seemingly free lunches often involve

significant costs thus earning for

themselves the nickname, the dismal

science

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Specialization, and Trade

The production possibility curve

becomes bowed out when individuals

specialize in the production of goods for which they have a comparative

advantage and trade with others

Comparative Advantage,

Specialization, and Trade

The comparative advantage argument used to explain the bowed-out shape of the production possibilities curve can be used to show how trade makes society better off

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Specialization, and Trade

Collaboration and specialization can

make society better off

Total production can rise

Comparative Advantage,

Specialization, and Trade

The outward bow graphically represents the potential gains from trade

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The Gains From Trade

Sunder can either write one economics paper or four creative writing papers in

a day

Ti can either write one creative writing paper or four economics papers in a day.

The Gains From Trade

Sunder has a comparative advantage in creating writing and Ti has a

comparative advantage in economics

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The Gains From Trade

The following table and production

possibility curves demonstrate how

output increases when two individuals collaborate and specialize in the activity for which each has a comparative

advantage

The Gains From Trade, Fig 2-6a, p 41

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The Gains From Trade

Each individual's PPC is drawn by

connecting the number of papers each can write in a day on a graph

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The Gains From Trade

The combined PPC curve is drawn by finding three points and connecting

them

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Creative writing

The Gains From Trade

Point A: This is the combined number

of economics papers they both can

write in a day

If economics papers are on the Y axis, it

is point 0,5

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The Gains From Trade

Point B: This is the combined number

of creative papers they both can write in

a day

If economics papers are on the Y axis, it

is point 5,0

The Gains From Trade

Point C: This is where each is focusing

on that activity for which he or she has

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The Gains From Trade

The combined PPC is bowed out

because of comparative advantage and specialization

The Division of Labor

Markets allow specialization and the

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Growth

Markets and specialization have led to growth

Markets, Specialization, and Growth

The growth in per capita income

(constant 1990 dollars) in the past 2

millennia has been astonishing

This owes largely to the introduction of markets and democracy

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Growth in the Past Two

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Organization Of Society

End of Chapter 2