Section 2 Seven Major Sources of Economic Progress February 28 2011 1 The Legal System The foundation for economic progress is a legal system that protects privately owned property rights and enforces contracts in an evenhanded manner Private property rights involve 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property Lack of property rights lack of economic progress Even handed enforcement of understandable and stable laws is also important for economic progress All about the rules of the game Stability of the rules is important 1 Incentive to use resources in ways that are considered beneficial to others i e Own an empty lot on campus cid 224 convert into a parking lot and charge money because you know people will want to use it in high demand Owners bear the cost of ignoring the wishes of others i e Paint your house neutral colors the least offensive to the largest population When you go to sell it it will have higher value because more people are attracted to it 2 Private owners have an incentive to care for and manage what they own i e How you treat your own bathroom in comparison to a public bathroom 3 Private owners have an incentive to conserve for the future i e If you share a tub of popcorn with someone at a movie you each will try to get the most amount of popcorn before the other person eats it all Consequently you run out of popcorn early on in the movie If each person had their own tub of popcorn they can conserve it eat a normal pace so that it lasts the whole movie Tragedy of the commons when people overuse resources that are meant to be shared community owned 4 Private owners have an incentive to make sure their property does not damage your property i e Why we keep dogs on a leash do not want the dog to attack a person i e Why we are careful when opening our car doors when we are parked to a nicer car The more valuable the surrounding property the more incentive you have to take care of it 2 Competitive Markets Promotes the efficient use of resources and provides a continuous stimulus for innovative improvements A Competition places pressure on producers to operate efficiently and cater to the preferences of consumers B Competition gives firms a strong incentive to develop better products and discover low cost methods of production Make better things at a lower costs generates high demand C Competition also discovers the business structure and size of the firm that can best keep the per unit cost of a product or service low Large firm vs small firm i e Doctors offices small more efficient i e Manufacturing factories large more efficient Why do People Hate Wal Mart Wal Mart employs sweatshop labor from other countries myth Wal Mart does not provide adequate compensation to their domestic employees myth employees choose to work there because they believe that is the best job they can get Wal Mart destroys local small business community myth allows small businesses who do not offer the same products services that Wal Mart does to open reshuffles business from one sector to another Costs usually what is seen Benefits usually what is unseen Competition out of business Creates other businesses Saves consumers money Provides lots of jobs March 2 2011 Example of seen vs unseen Is the doctor s office always crowded NO Doctor s Office Hours 9 00am 11 00am 11 00am 1 00pm 1 00pm 5 00pm People in Waiting Room 2 unseen most people at work 20 seen most people on lunch break 3 unseen most people at work 2 3 Limits on Government Regulation Economic progress comes through limiting government regulation that reduces trade and retards economic progress A Many countries impose regulations that limit entry into various businesses and occupations I e How many days to get permits for opening up a clothing business Poorer countries Wealthier countries Peru 289 days Haiti 196 days Congo 155 days Singapore 4 days U S 6 days B Regulations that substitute political authority for the rule of law and freedom of contract tend to undermine gains from trade Political leaders tell people what to do rather than individuals making decisions for themselves William Baumel 1990 Productive and Unproductive Entrepreneurship 2 ways to make money voluntary trade or coercion More policies cid 224 more lobbying cid 224 less productivity in making selling products better faster cheaper etc 3 Existing companies like regulations to protect themselves from potential competitors coming into the market C The imposition of price controls will also stifle trade Price ceilings and price floors do not allow buyers and sellers to reach equilibrium and thus maximize their exchanges 4 An efficient Capital Market To realize its potential a nation must have a mechanism that channels capital into wealth creating projects investments Interest the price for loanable funds Productive investments will yield a return sufficient to cover all costs make profit however not all investment projects are productive I e unproductive investments government bailouts to companies that were making losses using tax dollars Governments can and do intervene in capital markets by allocating investment funds and fixing interest rates 1 Distorts market incentives Do not have to please customers just have to convince political figures to get money 2 Increases the importance of political rather than economic considerations Politicians think of the company more highly that what customers think of the company 3 Makes unproductive investments more likely Unproductive investments i e Lobbying vs Productive investments i e making their products better to attract consumers 5 Monetary Policy Inflationary monetary policies distort price signals undermining the market economy Inflation increased prices Money serves 3 purposes in our economy 1 Medium of exchange Avoid the unlikely double coincidence of wants cid 224 apple seller wants oranges and orange seller wants apples 2 Unit of account Only look at goods in terms of the dollar amount the common denominator Can track performance over time 4 3 Store of value Money does not expire unless inflation is present When the supply of money is constant or increases at a slow and steady pace then the purchasing power of money will be relatively constant If a dollar is worth the same today as it will a year from now you can monitor the worth of your dollar Inflation when the supply of money expands