© 2003 McGraw-Hill Ryerson Limited The Economic The Economic Organization Of Society Organization Of Society Chapter 2 Chapter 2 © 2003 McGraw-Hill Ryerson Limited 2 - 2 Laugher Curve Laugher Curve In capitalism man exploits man; in socialism it’s the other way ‘round. Abba Lerner © 2003 McGraw-Hill Ryerson Limited 2 - 3 Introduction Introduction An economic system must coordinate individuals' wants and desires. © 2003 McGraw-Hill Ryerson Limited 2 - 4 Introduction 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. © 2003 McGraw-Hill Ryerson Limited 2 - 5 Introduction Introduction Every economy faces the problem of how to make individuals do what society wants them to do. © 2003 McGraw-Hill Ryerson Limited 2 - 6 Introduction 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. © 2003 McGraw-Hill Ryerson Limited 2 - 7 Introduction Introduction An economic system must provide the incentives to do those things that alleviate scarcity—produce more and consume less. © 2003 McGraw-Hill Ryerson Limited 2 - 8 Introduction Introduction The two main economic systems of the past 50 years, capitalism and socialism, answer these immense coordination problems differently. © 2003 McGraw-Hill Ryerson Limited 2 - 9 Capitalism Capitalism 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. © 2003 McGraw-Hill Ryerson Limited 2 - 10 Under Capitalism: 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. [...]... 2 - 18 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 © 2003 McGraw-Hill Ryerson Limited 2 - 19 Socialism in Theory If individuals' inherent goodness will not make them consider the general good, government will force them © 2003 McGraw-Hill... practice is often called Soviet-style socialism Soviet-style socialism is an economic system that uses administrative control or central planning to solve the coordination problems what, how, and for whom © 2003 McGraw-Hill Ryerson Limited 2 - 21 The Production Possibilities Curve and Economic Reasoning The choices made by society are often presented in terms of a production possibility curve The production... 82 80 78 76 74 72 70 68 66 64 62 60 58 Hours of study in economics 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Grade in economics 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 20 hours of economics 0 hours of history 100 A Economics grade Hours of study in history 88 B C 70 46 40 58 66 D 20 hours of history 0 hours of economics E 78 94 98 History grade © 2003 McGraw-Hill Ryerson... production of some goods than to the production of other goods © 2003 McGraw-Hill Ryerson Limited 2 - 29 Increasing Marginal Opportunity Cost, p 33 Y 10 9 8 7 6 5 4 3 2 1 0 2Y If the slope of the production curve is -2 at A, the A opportunity cost of 1X is 2Y 1X 1 2 3 4 5 6 7 8 9 X © 2003 McGraw-Hill Ryerson Limited 2 - 30 Increasing Marginal Opportunity Cost The principle of increasing opportunity cost... 2 - 16 What’s Good About the Market? The primary debate among economists is about how markets should be structured, and whether they should be modified and adjusted by government regulation © 2003 McGraw-Hill Ryerson Limited 2 - 17 Socialism Socialism is, in theory, an economic system based on individuals’ good will toward others, not on their own selfinterest In principle, society decides what, how,... Opportunity Cost The production possibility curve is generally bowed outward since some resources are better suited for the production of some goods © 2003 McGraw-Hill Ryerson Limited 2 - 28 Increasing Marginal 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... possibilities curve shows the trade-offs among choices we make © 2003 McGraw-Hill Ryerson Limited 2 - 22 The Production Possibility Table A production possibility table lists the maximum combination of outputs that can be obtained from a given number of inputs © 2003 McGraw-Hill Ryerson Limited 2 - 23 The Production Possibility Curve A production possibility curve plots the maximum combination of outputs that... opportunity costs 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 © 2003 McGraw-Hill Ryerson Limited 2 - 31 A Production Possibility Table, Fig 2-2a, p 34 % of resources % of resources devoted to devoted to production Number production Number of burgers of DVDs Row of burgers of DVDs 0 20 40 60 80 100 0... a given number of inputs It slopes downward from left to right © 2003 McGraw-Hill Ryerson Limited 2 - 24 The Production Possibility Curve The production possibility curve not only demonstrates the opportunity cost concept, it also measures the opportunity cost © 2003 McGraw-Hill Ryerson Limited 2 - 25 The Production Possibility Curve The production possibility curve demonstrates that: There is a limit... capitalism individuals are encouraged to follow their own self-interest © 2003 McGraw-Hill Ryerson Limited 2 - 14 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 © 2003 McGraw-Hill Ryerson Limited 2 - 15 What’s Good About the Market? Most economists believe the market is a good way to coordinate individuals' . © 2003 McGraw-Hill Ryerson Limited The Economic The Economic Organization Of Society Organization Of Society Chapter 2 Chapter 2 © 2003 McGraw-Hill Ryerson Limited . economy faces the problem of how to make individuals do what society wants them to do. © 2003 McGraw-Hill Ryerson Limited 2 - 6 Introduction Introduction Sometimes the goals of society and. in Theory 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