Chapter 5  How Capitalism Answers Key Economic Questions

I. How Capitalism Answers the Key Economic Question
1 video

II. Market System Evaluated  

III. Other Economic Systems one vide

IV. What you should Know About Government

V. Middle Class Economic Questions

   VI. Readings    

Free Economic Classics: 1984 to The Worldly Philosophers

Current U.S. Political Economy Controversies (

One-page Political Economy Crib Notes

   Test Review Notes Chapters 1-7

Chapter 6 Government's Economic Functions

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Lecture Notes

I.  How Capitalism Answers the Economic Questions

   A. What to produce?
           1. Which goods?
               a. Those that can be sold at a profit, consumers vote with dollars
               b. Accounting Profit: The amount by which total revenue exceeds
                   accounting costs (rents, wages, and interest) Note these are
                   three of the four
Factors of Production    
               c. Normal Profit
                   1. Amount received for enterprise
                   2. Considered by economists to be a cost
Economic Profits
                  1. The amount by which total revenues exceed all "Factor" costs.
                       Some think of it as a surplus.
                  2. Expanding industries have economic profit. 
                      a) Bill Gates, founder of Microsoft, has earned billions of dollars. 
                      b) So has Sam Walton of Wal-Mart 
Lester C. Thurow Profits, Concise Encyclopedia of Economics.  
Difference between accounting economic and-normal
         2. How many goods?
             a. Level of demand and efficiency of supply determine output.
             b. Society determines total demand
                (who works, how often and for how many years).
            c. Success of economic system determines efficiency of supply.
Wealth Hits Another Peak. Time to Celebrate or Worry? 8/1/17
 Editor's Note: Income distribution id a political question.

How to p
          1. Companies must be competitive
          2. Competition is the "Invisible Hand" assuring
              a. High quality goods are produced.
              b. Efficient production methods are employed.
              c. Prices and profits are reasonable.
              d. For more read
Adam Smith and the invisible hand by H Joyce

          3. Technology and innovation are instrumental to success.


     C. Who will receive production?
          1. Those willing and able to pay
          2 .Function of income, savings, and attitude toward debt financing
          3. In a Mixed Economy the government has a say in who receives production.
Taxes and history-of-us-taxes/
          4. Budget Deals from Congress where everyone has everyone receiving more!


         6. Readings on Government Affecting Wellbeing
             a. How Tax Competition Benefits Workers – R. Boccia & J. Howe
             b. Capitalism, Socialism, and Unfreedom – P. Krugman, N Y T
             c. Middle Class Economics

How will the economy adapt to changing environments?
         1. Today's economic environment is changing rapidly because of
              the communication revolution. 
         2. Magnitude of change is similar to that which occurred in the
             last quarter of the 19th century. 
             See Economic Normality 1945-2015
                    World Changed and Good Jobs Disappeared
                    Why the Fed simply doesn't get it

3. Companies and individuals must "adapt or be gone." 
         4. Capitalism allows creative destruction to work. 
         5. Recently technology has changed rapidly and people
              are being adversely affected 
             a. Normally, political forces would attempt to slow creative destruction.
             b. But the 1990's was the decade of free enterprise with little creative
                 destruction talk.
             c. Perhaps the next recession will slow down the free market revolution. It Did.
             d. A socialist Solution

              e. What is Capitalism? socialist view of economic questions

       f. The Implosion of Neoliberalism

   E. How Much Wealth is Enough?

Unit I Review What and how to produce, Who receives production,
 adapting to changing environment

Political Economy

Who Will Receive Production is a Political Question

Pure Socialism and Capitalism Lost to Mixed Economies


$13 Trillion Spent to Negate Covid Shutdown.


                 Rich get their share.

Here is One Reason


Gallup poll.

Readings Should California Ambitious Climate Policy
 Be a Model for the World

II. Market system evaluated
    A. Advantages
          1. Resources allocated efficiently
          2. Economic freedoms abound (freedom of enterprise and economic choice) 
    B. Disadvantages
          1. Too dependent upon competition  which is often eroded by monopoly power. 
               Waste and inefficiency result because of monopoly power exercised by
               business, unions, governments, and interest groups.
          2. Inequitable distribution of income (economic survival of the fittest)
          3. Market failure occurs 
              Not all costs (pollution) and benefits (public health) are properly accounted for
              because measuring their cost and benefits in dollars is difficult and subjective.
          4. Political process sometimes interferes with creative destruction.
    C. Current Topics
           1.  Basic Characteristics of Capitalism
           2. Political process sometimes interferes with creative destruction affecting efficiency
Modern Capitalism has many new features
           4. Criticism of Modern Capitalism    

Two Big Questions

Note: IMF data makes me nervous!

Unit II. Review Efficiency and freedom must be balanced
 with need for regulation and income inequality.


III. Other Economic Systems
  A. Introduction
           1. Pure capitalism of Adam Smith never existed.
           2. Recent economic systems are Mixed Economies Capitalism and Socialism mixed
               See Democratic Capitalism vs. Capitalistic Democracy
      B. Other Economic Systems         
          1. Socialism has some collective ownership and management of economic resources
               that are more equally distributed.
See History of Socialism
Democratic Socialism as practiced in Western Europe has public ownership of key
               industries such as transportation and communication.
               a. Economic systems of Europe began moving away from socialism
                   toward capitalism in the late 1970's.
Margaret Thatcher former prime minister of England started this trend.
Ronald Reagan agreed and stressed the market system during his presidency. 
              d. Capitalism and Socialism
Capitalism vs. Socialism Crash Course Video in World History
                      #33 uses humor teaching the basics.
Laissez fair Capitalism vs. Socialism Video See Social democracy 

                      Editors Question: Will China's system
Democratic Socialism?
  3. Communism is the ideal of those practicing a "Marxian  system. " 
Bolsheviks wanted immediate revolution.
                        a. 19th century philosopher
Karl Marx created the system.
                        b. Wealth is collectively owned/managed in a
planned command economy.
                        c. The 
Paris Commune of 1871 along with the French Revolution explains
                             why so many feared change promised by new liberal economic systems.
                        d. Some equate communism with a totalitarian political system democratic
                            communism has never existed.
                        e. This very left pro-labor anti-religious economic philosophy was despised
                             by most Western Oligarchs many of whom preferred Nazi Fascism over
                             any brand of Communism

Ten Questions and Answers About Americas Big Government


              Unit III. Review Socialism has government ownership and management
                           of large-scale means of production, Communism has
             equal distribution of production and wealth

Some Criticize Dramatically

Some Question his motives as  Michael Moore's
 estimated net worth is  50 million dollars.



One-Page Economic Issues

Has Capitalism Failed?  
Criticism of Modern Capitalism   

Health Coverage
Elizabeth Warren’s Blames Oligopoly Power

Political Economy Video

Middle Class Wellbeing
Middle Class Economics  
Middle Class Safety Net
Is Capitalism to Blame for Middle-Class Plight

Individual Issues 
World Changed and Good Jobs Disappeared

Economic Wellbeing

Economic Future of Our Children

Political Issues
Is Politics About the Money?
Look Out the Window Economics
Should Tea Party Share Its Debt Tea?
Why is Poverty Controversial?
Is the Country in Trouble?  Economics Exposed

International Issues
Is Russia a U.S. Adversary?
Lost International Greatness
Lost Economic Greatness
Free Trade Solution or Problem
The Problem of Terrorism

Recent Terror Information

Capitalism Not Cause of Middle-Class Plight
Economics Exposed
Everyone is on Welfare
Is Financial Aid Welfare?
College Tuition Not Going Up Rapidly







Ronald Reagan and Margaret Thatcher at the White House,
16 November 1988  Click to enlarge.







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