The Industrial Revolution
THE MARKET ECONOMY
WHY ARE SOME COUNTRIES RICH AND OTHERS POOR?
LOW, MIDDLE AND HIGH INCOME
INSTITUTIONS, INSTITUTIONS,
INSTITUTIONS

The answer to our question seems to lie in the
political and legal institutions of each nation
Rule of law—what you own depends not on force or
who you know, but is protected by law that treat all
persons equally
 Private property rights—the rights to use and sell
resources are clearly defined, cheaply enforceable,
and fully transferable
 Open markets—people are free to buy and sell
when, where and to or from whom they wish,
including citizens of other nations

EFFECTS OF INSTITUTIONS

Secure property rights, rule of law, and open
markets encourage people to make long term
investments in human and physical capital
Education, buildings, innovation, land quality,
infrastructure, etc
 These investments raise the capital stock—both
physical and human capital stocks
 This in turn generates income over the long run,
raising living standards and human well being

THREE ECONOMIC QUESTIONS

Every society must answer three economic
questions…
1.
2.
3.

WHAT?
HOW?
FOR WHOM?
How that society answers the questions
determines which type of economic system
that society employs
WHAT TO PRODUCE?

WHAT goods and
services will be
produced with the
available resources?
RESOURCES A.K.A. THE FACTORS OF PRODUCTION

Economists classify resources into 4 categories
1.
Land


2.
Labor


3.
Human resources
The payment for Labor is WAGES
Capital (a product of Investment)


4.
Natural resources
The payment for Land is RENT
Tools, machines, factories
The payment for Capital is INTEREST
Entrepreneurship


The special ability of risk-takers to combine land,
labor and capital in new ways in order to make profit
The payment for Entrepreneurship is PROFIT
CHECK FOR UNDERSTANDING
At the top of a paper write Natural Resources , Human Resources
and Capital Goods . Place these items under the correct
heading.








• Delivery Truck
• Factor
• ATM machine
• River
• Gold
• Doctor
• Bulldozer
• Factory worker
• Teacher
• Tree
• Bushel of corn
• Hair stylist
• Barrel of oil
• Farmer
• Tractor
ANSWER KEY
Natural
Resources
 Tree
 Bushel of
corn
 River
 Gold
 Barrel of oil
Human
Resources
 Teacher
 Hair stylist
 Doctor
 Farmer
 Factory
worker
Capital Goods
 Delivery truck
 Factory
 ATM machine
 Bulldozer
 Tractor
HOW TO PRODUCE?

HOW will the available resources be combined
to produce goods and services?
FOR WHOM TO PRODUCE?

WHOM will be the consumer of the product or service?
THREE ECONOMIC SYSTEMS
 Command
Economies
 Traditional
Economies
 Market
Economies
MARKET ECONOMIES


Answer the key questions by a
system of supply and demand. (in
other words, it allows buyers and
sellers to voluntarily exchange
things)
The ability of markets to coordinate
economic activity is emphasized by
Adam Smith in
“The Wealth of Nations.”
 This is what he referred to as
the Invisible Hand
THE INVISIBLE HAND
...every individual necessarily labours to render the
annual revenue of the society as great as he can. He
generally, indeed, neither intends to promote the public
interest, nor knows how much he is promoting it. By
preferring the support of domestic to that of foreign
industry, he intends only his own security; and by
directing that industry in such a manner as its produce
may be of the greatest value, he intends only his own
gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of
his intention. Nor is it always the worse for the society
that it was no part of it. By pursuing his own interest he
frequently promotes that of the society more effectually
than when he really intends to promote it. I have never
known much good done by those who affected to trade
for the public good.
INVISIBLE HAND

What is Adam Smith basically saying with
this passage?
 If
individuals are allowed to pursue their own
self-interest, then the often times the result will
be a more efficient economy. There is NO
PLANNING

What do you think Adam Smith envisioned
as the role of Government in the economy?
COMMAND ECONOMIES

Answer the key questions through a central
authority made up of an individual or a number
of individuals who make the decisions of what
to make, how to make it, and for whom things
should be made. (Self-Interest and Competition
are absent)
 Communism
 Socialism
TRADITIONAL ECONOMIES
Answer the key questions by relying on past
customs and practices:
“The Inuit of northern Canada serve as a prime example
of a traditional economy. For thousands of years, the Inuit
parents have taught their children the survival skills
needed to survive in the Arctic Circle's severe climate. The
children are taught to fish, hunt, and make effective tools.
Once learned, these skills are passed down to the next
generation.”
GOALS OF ECONOMIC SYSTEMS
Efficiency (maximize what you have)
 Freedom (ability to make choices)
 Security (goods/services will always be
available)
 Equity (Fairness, Opportunity)
 Growth (Economy must grow with population;
innovation)
