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1. An increase in the quantity of resources. An increase in the quantity of labor, land, capital,<br />

or entrepreneurship increases productive capacity.<br />

2. An advance in technology. Technological advance is the ability to produce more output per<br />

resource. The increased output per resource increases productive capacity.<br />

Economic growth is discussed in more detail in Chapter 14.<br />

Economic Systems<br />

Scarcity forces every society to answer economic questions. The way in which a society answers<br />

economic questions is its economic system. The two primary economic systems are capitalism<br />

and socialism. The two primary economic systems are the product of two very different economic<br />

visions; the capitalist vision and the socialist vision. Each vision is summarized below for the<br />

following important topics; private property, market prices, and government.<br />

Capitalist vision:<br />

1. Private property is economically and politically desirable. Private property is economically<br />

desirable because it leads to the efficient use of resources. Self-interest (e.g. the goal of profitmaximization)<br />

will lead resource owners to use their resources in ways that benefit society.<br />

The more consumer satisfaction that a resource generates, the more income the resource<br />

owner will receive. Resource owners will direct their resources to the use that is most highly<br />

valued by consumers and will use their resources as efficiently as possible. (Remember<br />

Examples 9 and 10 in Chapter 1.) This is economically desirable because it contributes to<br />

achieving the basic goal in dealing with the problem of scarcity; produce as much consumer<br />

satisfaction as possible with the limited resources available.<br />

Private property is politically desirable because it contributes to individual freedom. Resource<br />

owners are free to use their private property as they see fit. Collective ownership of resources<br />

would require collective decision making instead of individual decision making. Thus, collective<br />

ownership of resources would reduce individual freedom. The connection between capitalism<br />

and individual freedom is examined further in two appendices at the end of the chapter.<br />

2. Market prices contribute to economic efficiency. Prices determined in free markets<br />

contribute to economic efficiency by providing information, incentives, and rationing.<br />

Example 9: If a hurricane knocks out electricity in south Florida, the demand for electric<br />

generators in south Florida will increase. With the increase in demand, the market price of electric<br />

generators will rise. (We will look at this in detail in Chapter 3.) This higher price is useful<br />

information to potential buyers and potential sellers of electric generators. The higher price gives<br />

generator sellers the incentive to supply more generators (such as by shipping generators into<br />

south Florida from other markets). It gives generator buyers the incentive to look for alternative<br />

(and cheaper) sources of power. The higher price rations resources toward the production (or the<br />

shipping) of more generators. The higher price rations the available generators to the buyers who<br />

are willing and able to pay the most for the generators (and thus apparently have the most<br />

valuable use for the generators).<br />

3. Government is inherently inefficient and should be limited. Government is necessary in a<br />

market economy. Government enforces private property rights and contract rights. However,<br />

government cannot possess as much information as the millions of individual decision makers<br />

in the private market. Nor can government coordinate the competing desires of the millions of<br />

individual decision makers as well as prices determined in free markets can. Nor is<br />

government motivated to secure the self-interest of the millions of individual decision makers.<br />

Government may be more responsive to special-interest groups than to concerns about the<br />

general welfare (see Chapter 28). Since the outcome reached in the market is generally<br />

efficient, any government intervention is likely to reduce economic efficiency.<br />

FOR REVIEW ONLY - NOT FOR DISTRIBUTION<br />

2 - 5 Trade and Economic Systems

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