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capitalism A broad economic system where
competition in a free market determines the price, production and consumption of goods and services through the “invisible hand” of supply and demand
socialism Broad economic system in which the major
enterprises are either owned or controlled by the state
Chile mine disaster In August 2010, 33 miners were trapped 2,300
feet underground in a mine in Chile They were three miles from the entrance It was presumed they were killed in collapse 17 days after the accident, a bore hole drilled
came back with a note: "Estamos bien en el refugio, los 33" (English: "We are well in the shelter, the 33“)
“If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What happened over the past 25 years that meant the difference between life and death for those men? Short answer: the Center Rock drill bit.”
“The Center Rock drill… is in fact a piece of tough technology developed by a small company in it for the money, for profit. That's why they innovated down-the-hole hammer drilling. If they make money, they can do more innovation.”
“The profit=innovation dynamic was everywhere at that Chilean mine... In an open economy you will never know what is out there on the leading developmental edge of this or that industry. The miners’ rescue is a thrilling moment for Chile... But I’m thinking of that 74-person outfit in Berlin, Pa., whose high-tech drill bit opened the earth to free them...”
What are the world’s freest economies? Hong Kong, 20th consecutive year Singapore, Australia, Switzerland, New
Zealand Canada, Chile, Mauritius, Ireland, Denmark
Profits and Losses Remember: P&L play equally important roles
in maintaining and advancing the standards of living of the country
Profits and Losses Remember: P&L play equally important roles
in maintaining and advancing the standards of living of the country
Both P&L force efficiencies on companies
Profits and LossesRemember: P&L play equally important roles
in maintaining and advancing the standards of living of the country
Both P&L force efficiencies on companiesNo accident that people in free markets have
higher standards of living than those in controlled economies
Profits and losses When one business in a market economy –
aka capitalism – finds a way to lower costs, competitors usually have to do the same
Profits and losses When one business in a market economy –
aka capitalism – finds a way to lower costs, competitors usually have to do the same
Wal*Mart lowers food prices by 6-12% when it rolls into town
Profits and losses When one business in a market economy –
aka capitalism – finds a way to lower costs, competitors usually have to do the same
Wal*Mart lowers food prices by 6-12% when it rolls into town
How city of Sarasota responds: $5 million subsidy for Whole Foods, refuses to allow Wal*Mart to build on Ringling Avenue
Profits, take 2 Hope for profits and threat of losses force
capitalists to produce at the lowest cost and sell what customers are willing to buy… i.e., an incentive to be as efficient as possible with scarce resources that have alterative uses
Profits, take 2 Hope for profits and threat of losses force
capitalists to produce at the lowest cost and sell what customers are willing to buy… i.e., an incentive to be as efficient as possible with scarce resources that have alterative uses
Consumers gain when companies fight to earn profits and avoid losses through lower prices and innovation
More about ProfitsProfits are the price paid for efficiency If the cost of the profits exceeded the value of
the efficiency they promoted, then non-profits like governments and schools could get the same things done cheaper or better than for-profit companies
More about ProfitsProfits are the price paid for efficiency If the cost of the profits exceeded the value of
the efficiency they promoted, then non-profits like governments and schools could get the same things done cheaper or better than for-profit companies
Fat chance… governments outsourcing of garbage, janitorial services, payrolls, security, prisons to private businesses
Even more about profits While capitalism has a visible cost – profits –
that does not exist under socialism, socialism has an invisible cost: inefficiency
Even more about profits While capitalism has a visible cost – profits –
that does not exist under socialism, socialism has an invisible cost: inefficiency
Profit is the price paid for efficiency
Even more about profits While capitalism has a visible cost – profits –
that does not exist under socialism, socialism has an invisible cost: inefficiency
Profit is the price paid for efficiency History shows that capitalism has had far
more people living well than socialism
Myths about profits “Greed” drives profits, resulting in higher
prices for consumers Fact: most fortunes have been made by
companies making things cheaper for consumers… Wal*Mart, Facebook, Henry Ford, Dell, Google
Myths about profits Profit margins for American business are
obscene Average rate of return on investments ranged
from 2.2-7.8% from 1960-2005
Profits redux In private business, the owner is an
“unmonitored monitor” rather than having layers of authorities
Profits redux In private business, the owner is an
“unmonitored monitor” rather than having layers of authorities
Self-interest takes the place of external monitors and forces attention to detail… driving efficiency
Profit Rates Gross profit on sales: buy something for $10
and sell it for $15 Net profits: profits after overhead such as
employees, electricity, inventories, taxes, etc. are accounted for
Profit Rates Gross profit on sales: buy something for $10
and sell it for $15 Net profits: profits after overhead such as
employees, electricity, inventories, taxes, etc. are accounted for
Profit on investment (aka, Return on Investment or ROI): most important measure, because it’s what causes $ to flow to various sectors
Costs of Production Crucial factor in determining prices and profits No set cost for producing anything: it costs a
lot more to make 1,000 of something than 100 million
Costs of Production Crucial factor in determining prices and profits No set cost for producing anything: it costs a
lot more to make 1,000 of something than 100 million
Costs of Production Crucial factor in determining prices and profits No set cost for producing anything: it costs a
lot more to make 1,000 of something than 100 million
Economies of scale: up to a certain point, it’s cheaper to make more of the same thing because you spread fixed costs over larger units of output, whether cars or pizzas
“Lower costs/unit of output as numbers increase is economy of scale”
Costs of production Advertising can actually improve sales and
profits if it causes more units to be sold
Costs of production Diseconomy of scale: there is a point where
the enterprise gets so large, it’s difficult to coordinate and monitor
Costs of production Diseconomy of scale: there is a point where
the enterprise gets so large, it’s difficult to coordinate and monitor
J&J is a $65 billion company broken up into 250 subsidiaries
Costs of production Diseconomy of scale: there is a point where
the enterprise gets so large, it’s difficult to coordinate and monitor
J&J is a $65 billion company broken up into 250 subsidiaries
Many big companies become stagnant and inefficient: GM, Microsoft
Costs of production Diseconomy of scale: there is a point where
the enterprise gets so large, it’s difficult to coordinate and monitor
J&J is a $65 billion company broken up into 250 subsidiaries
Many big companies become stagnant and inefficient: GM, Microsoft
McDonald’s grows through franchises to ensure local knowledge
Costs and Capacity Costs not only vary with the volume of output,
they also vary according to the extent to which capacity is being used
Costs and Capacity Costs not only vary with the volume of output,
they also vary according to the extent to which capacity is being used
In many industries, capacity must be built to handle peak volume, i.e., electricity companies, computer networks, phone companies
Costs and Capacity Costs not only vary with the volume of output,
they also vary according to the extent to which capacity is being used
In many industries, capacity must be built to handle peak volume, i.e., electricity companies, computer networks, phone companies
Priceline and Travelocity responded to excess capacity in travel industry
‘Passing on’ costs/savingsPassing on of costs depends on competitionMyth that companies can charge whatever
they want
‘Passing on’ costs/savingsPassing on of costs depends on competitionMyth that companies can charge whatever
they want If you develop a new technology that lowers
your production costs, you can either keep the extra profit or lower your price and sell more
‘Passing on’ costs/savingsPassing on of costs depends on competitionMyth that companies can charge whatever
they want If you develop a new technology that lowers
your production costs, you can either keep the extra profit or lower your price and sell more
Over time, competitors will match your advantage… thus constant innovation is essential
Specialization and Distribution A businesses is limited in the range of
functions it can perform efficiently
Specialization and Distribution A businesses is limited in the range of
functions it can perform efficiently Car companies buy tires, stereos, many other
parts
Specialization and Distribution A businesses is limited in the range of
functions it can perform efficiently Car companies buy tires, stereos, many other
parts Computer makers buy chips, screens,
sometimes most of their machines
Specialization and Distribution A businesses is limited in the range of
functions it can perform efficiently Car companies buy tires, stereos, many other
parts Computer makers buy chips, screens,
sometimes most of their machines Many companies buy janitorial, security,
payroll, accounting, ‘back office’ services
No, ‘middlemen’ are not baddiesGoods tend to flow to their most valued uses
in a free market and are more valuable to those who can handle them more efficiently at a given stage
No, ‘middlemen’ are not baddiesGoods tend to flow to their most valued uses
in a free market and are more valuable to those who can handle them more efficiently at a given stage
Furniture makers don’t own stores, many farmers don’t have transportation services
No, ‘middlemen’ are not baddiesGoods tend to flow to their most valued uses
in a free market and are more valuable to those who can handle them more efficiently at a given stage
Furniture makers don’t own stores, many farmers don’t have transportation services
What connects the self-interest of a company with the efficiency of the economy as a whole are prices
Distribution Middlemen can typically distribute products
more efficiently, whether in a developed or developing nation
Distribution Middlemen can typically distribute products
more efficiently, whether in a developed or developing nation
Socialist countries often eliminate middlemen and specialists at great sacrifices of efficiency