The Economic Organization Of Society pdf

© 2003 McGraw-Hill Ryerson Limited
The Economic
The Economic
Organization Of Society
Organization Of Society
Chapter 2
Chapter 2
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Laugher Curve
Laugher Curve
In capitalism man exploits man; in
socialism it’s the other way ‘round.
Abba Lerner
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Introduction
Introduction
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An economic system must coordinate
individuals' wants and desires.
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Introduction
Introduction
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An economic system has to solve three
coordination problems:
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What, and how much, to produce.
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How to produce it.
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For whom to produce it.
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Introduction
Introduction
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Every economy faces the problem of
how to make individuals do what society
wants them to do.
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Introduction
Introduction
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Sometimes the goals of society and
individuals conflict.
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An example is the NIMBY (Not In My Back Yard) phenomenon.
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NIMBY is a mindset in which individuals approve of a project so long
as it is placed somewhere else.
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Introduction
Introduction
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An economic system must provide the
incentives to do those things that

alleviate scarcity—produce more and
consume less.
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Introduction
Introduction
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The two main economic systems of the
past 50 years, capitalism and socialism,
answer these immense coordination
problems differently.
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Capitalism
Capitalism
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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.
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Under Capitalism:
Under Capitalism:
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Individuals are encouraged to follow
their own self-interest, while market
forces of supply and demand are relied
upon to coordinate those individual

pursuits.
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Under Capitalism:
Under Capitalism:
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Distribution of goods is to each
according to his or her ability, effort, or
inherited property.
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Under Capitalism:
Under Capitalism:
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Government must allocate and defend
private property rights.
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Private property rights – the control a
private individual or firm has over an asset
or a right.
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Reliance on the Market
Reliance on the Market
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Markets work through a system of
rewards and payments.
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In capitalism individuals are encouraged
to follow their own self-interest.

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Reliance on the Market
Reliance on the Market
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Prices coordinate individuals' wants.
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If there is not enough of something, its
price goes up.
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If there is too much, price goes down.
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What’s Good About the
What’s Good About the
Market?
Market?
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Most economists believe the market is a
good way to coordinate individuals'
needs.
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Market is, however, not fair nor is it
always efficient.
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What’s Good About the
What’s Good About the
Market?
Market?


The primary debate among economists
is about how markets should be
structured, and whether they should be
modified and adjusted by government
regulation.
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Socialism
Socialism
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Socialism is, in theory, an economic
system based on individuals’ good will
toward others, not on their own self-
interest.
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In principle, society decides what, how,
and for whom to produce.
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Socialism in Theory
Socialism in Theory
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Socialism is an economic system that
tries to organize society in the same
way as families are organized.
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Everyone contributes what they can and get what
they need, provided it is available.
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Socialism in Theory
Socialism in Theory
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If individuals' inherent goodness will not
make them consider the general good,
government will force them.
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Socialism in Practice
Socialism in Practice
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Socialism in practice is often called
Soviet-style socialism.
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Soviet-style socialism is an economic
system that uses administrative control or
central planning to solve the coordination
problems what, how, and for whom.
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The choices made by society are often
presented in terms of a production
possibility curve.
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The production possibilities curve
shows the trade-offs among choices we
make.
The Production Possibilities

The Production Possibilities
Curve and Economic
Curve and Economic
Reasoning
Reasoning
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The Production Possibility
The Production Possibility
Table
Table
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A production possibility table lists the
maximum combination of outputs that
can be obtained from a given number of
inputs.
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The Production Possibility
The Production Possibility
Curve
Curve
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A production possibility curve plots
the maximum combination of outputs
that can be achieved from a given
number of inputs.
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It slopes downward from left to right.
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The Production Possibility
The Production Possibility
Curve
Curve
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The production possibility curve not only
demonstrates the opportunity cost
concept, it also measures the
opportunity cost.
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The Production Possibility
The Production Possibility
Curve
Curve

The production possibility curve
demonstrates that:
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There is a limit to what you can achieve, given the existing
institutions, resources, and technology.
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Every choice made has an opportunity cost—you can get more of
something only by giving up something else.