Chapter 5 Key Economic Questions Society Must Answer
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I. Capitalism answers the key economic question
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
d. 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 many billions of dollars.
b) So has Sam Walton of Wal-Mart
c. Lester C. Thurow Profits, The Concise Encyclopedia of Economics.
e. 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.
d. Wealth Hits Another Peak. Time to Celebrate or Worry? 8/1/17
Editor's Note: Income distribution id a political question.
B. How to produce?
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 Helen Joyce of Plus magazine.
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.
4. Middle Class Economics
D. How will the economy adapt to changing environments?
1. Today's economic environment is changing rapidly because of the communication
2. Magnitude of change is similar to that which occurred in the last quarter of the
See Economic Normality 1945-2015 and World Changed and Good Jobs Disappeared and
Why the Fed simply doesn't get it [effect of end of inflation in our flat world]
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.
E. Visit What is Capitalism? for a socialist view of economic questions and capitalism.
Economics is About Reducing Scarcity
Who Will Receive Production is a Political Question
II. Market system evaluated
1. Resources allocated efficiently
2. Economic freedoms abound (freedom of enterprise and economic choice)
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
a. Not all costs (pollution) and benefits (public health) are properly accounted for.
b. Why? 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
3. Modern Capitalism has many new features
4. Criticism of Modern Capitalism
Unit II. Review Efficiency and freedom must be balanced with need for regulation and income inequality.Please III. Other Economic Systems
1. Pure capitalism of Adam Smith never existed.
2. Recent economic systems are Mixed Economies(a mixture of Capitalism and Socialism)
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
2. 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.
b. Margaret Thatcher former prime minister of England started this trend.
c. Ronald Reagan agreed and stressed the market system during his presidency.
d. Capitalism and Socialism
1. Capitalism vs. Socialism Crash Course Video in World History
#33 uses humor teaching the basics.
2. Laissez fair Capitalism vs. Socialism Video See Social democracy
Editors Question: Will China's system m 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 and managed in this 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 bran of
f. Ten Questions and Answers About Americas Big Government
Unit III. Review Socialism has government
ownership and management
Some Criticize Dramatically
Some Question his motives as
16 November 1988 Click to enlarge.
One-Page Economic IssuesPolitical Economy Video
Individual Issues World Changed and Good Jobs DisappearedEconomic Future of Our Children
Country Issues Federal Deficit Problem Can We Afford Entitlements Everyone is on Welfare Economically Less Dynamic States Is Russia a U.S. Adversary? Lost International Greatness Recent Terror Information
Primary Cause was Baby Boomers and Post WW2 Prosparity