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12 Cards in this Set
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- Back
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Adam Smith: Resolving the Conflict between Self-interest and Social Interest and Role of Competition |
A. Sympathy for Others and Ethics 1. Ifchildren, at an early age, learn to be ethical and have sympathy for othersthey will act in the best interests in social interest. B. Importance of Competition 1. We shouldpromote competition and avoid over charging; this will stop monopolies fromcharging extremely high prices. |
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Adam Smith: Role of Government |
- Companies will not produce goods that are good for society if they are not profitable; therefore, governments should produce goods that are good for society. 1. Government should provide infrastructure like roads and sewage. These are high cost investments which will not make sense for companies to produce them. However, infrastructure is vital for a country's economic development and government therefore should produce it. 2. Government should provide elementary school education. Everyone should have access to basic education at the government's expense. 4. Providing a transparent justice system; court systems 5. Government does not have a role in fighting recession because it is not much of a problem in a market economy. |
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Adam Smith: Division of Labor (Impact on Productivity) |
1. Division of Labor is the greatest improvement in the productive powers of labor. a. Specialization: labor would get divided into small tasks that greatly increase output. |
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Adam Smith: Division of Labor (Division of Labor in agriculture) |
1. In agriculture, labor cannot be separated because jobs occur at different times of the year. Therefore, the farmer is able to all these jobs him self. a. where as in industrial sectors, the labor can be divided greatly. -the fact that it is impossible to separate these jobs is the reason why agriculture lags behind manufacturing in development. |
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Adam Smith: Division of Labor (Reasons why its effective) |
1. Improved Dexterity a. Sincethe labor is divided, this man will only focus on one part of the productionprocess. This will be his only job. Therefore, his skills doing this simpleaction will increase due to repetition. 2. Saving of time a. Timeis saved when a worker specializes on one task and he is not required to movefrom work station to work station. 3. Division of Labor will lead workmen to create inventions to facilitate the work a.Naturally,workers are much more likely to invent a machine to facilitate a task if hissole attention is payed to that task. Why would he invent a machine for a taskthat he does not spend time on? |
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Adam Smith: Division of Labor and Trade |
Many of the ingredients of certain things travel from remote corners of the world. a. Due to specialization, countries were able to produce what they were suited for and what they didn’t have, they traded for it. |
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Adam Smith Price Theory: Natural Price of Resources (Long-Run price) |
-Smith believed that prices were determined by costs 1. Natural Price of Land a. determined by fertility; the more for fertile the land, the higher the natural rent (in the long run) 2. Natural Price of Wages a. Subsistence Wage: in the long run, the wage will be as low as it takes to keep you alive. 3. Natural Price of Interest (residual profit) a. The profit after the company pay the wages rent. Essentially its the profit left for the entrepreneur after expenses. |
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Adam Smith's Price Theory: Market Price of Resources (short-run price) |
A. Market Price (short-run price)
a. Market price is influenced by demand. In the short-run, market price can be above or below natural price Ex: It costs $10 to produce a bushel of wheat. Quantity Produced = 1M; Quantity demanded = 1.5M; therefore, price will INCREASE since there is a shortage . Subwage = $1; Quantity Demanded of workers = 10K workers; Quantity Supplied of workers = 8K; Since there is a shortage workers, wage will increase because companies will try to outbid each other for workers. |
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Adam Smith's Price Theory: Role of Competition in Natural Price |
1. COMPETITION MAKES MARKET PRICE = NATURAL PRICE IN THE LONG RUN
a. Competition will prevent companies from over charging |
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Adam Smith's Price Theory: Natural Prices of Goods and Services (Costs of resources determines natural price) |
1. Natural Prices of Goods and Services a. Goods and services are made using resources. Costs of resources determines the price of goods and services a. If it costs more to produce a good, the price of the good will increase. b. Firms will pass on costs to consumer |
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Adam Smith's Price Theory: Market Prices (short-run price) of Goods and Resources (determined by demand) |
1. Market prices (short-run price) of goods and resources a. Market price is determined by demand Ex: Natural price of corn = $8 8; QS = 2M bushels; if buyers buy the full 2M bushels, market price = natural price b. QD corn = 3m; QS corn = 2m.. now there is a shortage so price will INCREASE and be ABOVE the natural price c. QD3 corn = 1.5M; QS = 2M; now there is now a surplus so price will DECREASE and price will be BELOW the natural price 3. To make the market price = natural price, farmers will grow MORE corn if the price is higher. Then, when the corn is harvested the price will go DOWN because the SUPPLY NOW MATCHES THE DEMAND. |
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