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Chapter 5
Key Economic Questions Society Must Answer
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I. How capitalism answers the key economic question
   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. 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. Economic Profits from wiki
                  d. Lester C. Thurow Profits, The Concise Encyclopedia of Economics.  
        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 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
   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
adversely affected 
            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 revolution.
   E. Visit
What is Capitalism? for a socialist view of economic questions and capitalism.

New WhiteSmoke 2009

II. Market system evaluated
     A. Advantages
          1. Resources allocated efficiently
          2. Economic freedoms abound (freedom of enterprise and economic choice) 
     B. Disadvantages
          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. Interesting Opinions
       
   Political process sometimes interferes with creative destruction.
    
D. Interesting Opinions
       
  1. Examining the Pros and Cons of Global Capitalism   Doug Schuler of Rice University
       
  2. The Pros & Cons of Capitalism (53 Replies) from AnswerPool.com

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