THE ECONOMY AND SOCIAL ORGANIZATION

Property rights

• The ownership of property -- factors of production and the output of goods and services -- must be secure.

• Why work if the fruits of your labour will be taken from you?

• Why save and accumulate capital, helping the economy grow, if someone will confiscate that capital and leave you as poor as before?

Law and Order versus Theft and coercion

• From simple robbery to bending or breaking of the law in sophisticated ways by the powerful. If goods can be obtained through theft, there is little need to produce.

• All governments engage in coercion when they tax. If a state is necessary, taxes and therefore coercion are necessary.

• No taxation without representation was a slogan of the American revolution. Democracy is seen to justify this form of coercion.

Market exchange

• Motivated by the desire to earn the largest income possible, to buy cheap and to sell dear.

• Individuals pursue their self-interest (or perhaps the interest of their family).

• In most societies it is regarded as, at best, morally neutral – neither good nor bad.

• Often it is regarded as morally negative, that is motivated by greed or self interest.

Redistribution

• Taking of goods or services from one person and giving them to another.

• Governments in all societies engage in exchange via redistribution.

• Sometimes they redistribute from the poor to the rich, sometimes from the rich to the poor.

• Redistribution is always coercive. You cannot choose whether or not to pay taxes.

Reciprocity

• Exchange between two people with close social ties.• A return of similar value is expected if similar

circumstances occur.• An example: You help your buddy move. Then when you

move your buddy helps you. • Coercion is not involved, although social pressure my be

strong. • The motive to exchange is not solely pecuniary. Instead

people are usually are attempting to maintain good social relations while solving real economic problems.

• Reciprocity is usually regarded as morally good.

Income equality

• In a market society income equality depends on the distribution of ownership of factors of production and to a lesser extent on the rates of return earned by those factors.

Factors of production

Income

Land Rent

Labour Wages

Capital Interest

Entrepreneurship Profit

Labour

Slavery: Slaves do not own their own labour. Their owners own the wages they earn.

Free society: In our society everyone owns their own labour and their own human capital. You are free to rent it out (work for a wage or a salary) but you are not free to sell yourself into slavery.

How much labour do you own?

• The very old, the very young, the disabled and the mentally incompetent own no labour..

• The unskilled own only their physical strength, natural dexterity, common sense.

• Women on average own less physical strength than men. Child care and house keeping are often defined as the mother’s responsibility. As a result women have less labour power to sell in the market.

Human capital

• Experience, skills and education greatly increase each person’s earning power.

• Obtain human capital by access to: – jobs which give good experience. – education:

• Discrimination – excluding people from specific fields by explicit policy or through informal discouragement – may limit access to education or to jobs.

Capital

• People inherit ownership in capital.

• People save and accumulate capital.

• A fundamental principle of communism was that capital should be owned by the workers. In practice, the ownership and control of the capital of firms rested with the state.

Land

• A person can inherit land • a person can save and accumulate to purchase land.• Different societies originally granted lands in different

ways. – In Latin America a few people were given very large grants of

land. – In most of North America fewer large grants were given and

more family farm sized grants were given

• In Canada now, many natural resources are privately owned, but the government owns most mineral rights such as oil and gas.

Entrepreneurship

• The willingness to take risks in assembling the other factors of production and organizing them for production.

• Profit is the reward for risk taking.

BASIC ECONOMIC TASKS OF SOCIETY

• Every society must combine the factors of production to solve basic economic problems.

• What to produce?

• How to produce it?

• Who receives the output?

APPROACHES TO SOLVING THE ECONOMIC PROBLEM

• Decisions are made through market exchange by individuals pursuing their self-interest.

• Decisions are made by a coercive power (government) and commands are given.

• Decisions are made within families and among friends to support social ties as well as produce output.

The Firm and Economic Organization

• A firm is an organization which buys factors of production and puts them to use producing goods or services.

• A firm can be a family farm, a doctor’s office, a hot dog stand or General Motors.

• In modern capitalism, production takes place within firms.

TYPES OF FIRMS

Three types of firms– Sole Proprietorship

• Most numerous

– Partnership

– Corporation• Most output

Sole proprietorship

• One owner. • No formal process to establish a sole

proprietorship. • Unlimited liability: All the assets of the

owner, including a home or personal stereo set can be claimed to pay off debts incurred in operating the firm.

• Profits are taxed as the personal income of the owner.

Partnership

• more than one owner.

• Can be established informally. Wise partners enter into a legal agreement

• Unlimited liability for each owner.

• Profits are taxed as the personal income of the owner.

Corporation

• The firm is considered a legal person that can be sued in court and taxed.

• one or more owners who are called stock or share holders.

• Must be established through a legal process. • The profits of the corporation may be paid out in

dividends or may be reinvested in the firm as retained earnings.

• Limited liability: The most the owners can lose is the funds they invested in purchasing the shares of the firm.

• Profits are taxed first as the income of the corporation. When they are paid out as dividends on the shares of the company they are taxed again as the personal income of the owners.

MARKET STRUCTURE

• Economists define four types of markets:– Perfect competition– Monopolistic competition– Oligopoly– Monopoly

Perfect competition

• Many firms and many buyers producing identical products.

• Firms can easily enter and exit the market.

• All participants are well informed about prices and other market conditions.

• Beef farmers, blueberry farmers and the stock market are perfectly competitive

Monopolistic competition

• Many firms and many buyers producing slightly different products. (The only difference may be location.) Products are differentiated.

• Firms can easily enter and exit the market. • All participants are well informed about prices

and other market conditions. • Fast food restaurants are monopolistically

competitive.

Oligopoly

• A small number of firms produce either similar or different products.

• Pepsi and Coke are oligopolies.

Monopoly

• One firm produces a good with no close substitutes.

• Entry to the industry is not possible. • Microsoft has a near monopoly of the

operating systems of PCs. N.S. power has a monopoly on the production of electricity in Nova Scotia. The NSLC has a monopoly on the sale of liquor in Nova Scotia.

Market Structure

• Most firms operate in industries with market conditions some what less perfect than perfect competition.

• Many saw mills produce identical products for many purchasers, but they all differ in location.

• Many ‘monopolized’ products have relatively close substitutes.

• The Post office has a monopoly on the delivery of ordinary letters, but they compete with the telephone, with email and with courier services. Electricity competes with fuel oil in home heating.