| 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)
c. Normal Profit
1. Amount received for enterprise
2. Considered by economists to be a cost
d. Economic Profit
1. The amount by which total revenues exceed all "Factor" costs.
2. Some think of it as a surplus.
3. 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
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.
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
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
D. How will the economy adapt to changing environments?
1. Today's economic environment is changing more rapidly because
of the communication revolution.
2. Magnitude of these changes is similar to that which occurred in the
last quarter of the 19th century.
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
a. Normally, political forces would attempt to slow creative destruction.
b. But, the 1990's was the decade of free enterprise so creative
destructions moved on.
c. Perhaps the next recession will slow down the free market
E. Market system evaluated
1. Advantages are resources allocated efficiently, economic freedoms (enterprise,
a. Too dependent upon competition eroded by monopoly power resulting in waste
and inefficiency result because of monopoly power exercised by business,
unions, governments, and interest groups.
b. Inequitable distribution of income (economic survival of the fittest)
c. Market failure occurs
1. Not all costs (pollution) and benefits (public health) are properly accounted for.
2. Why? because measuring their cost and benefits in dollars is difficult and
d. Political process sometimes interferes with creative destruction.