Notes For Chapter 5

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- One reason for the popularity of price controls is a confusion between prices and costs.

- What politicians mean by bringing down the cost of medical care is reducing the price of
medicines and reducing the fees charged by doctors or hospitals.

- Price controls are popular but the consequences are lasting and often become worse over
time.

- All the schemes have in common is that they exempt some things from the process of
weighing costs and benefits against one another -> essential for economics

- The valuable role of economics is to convey information about an underlying reality and
incentives to respond to that reality.

- Knowledge is one of the scarcest of all resources, prices play an important role in economizing
on the amount of knowledge required for decision-making by individuals / org.

- A lot of knowledge is required in a economy that does not rely on the prices

Chapter 5: The rise and fall of Businesses

- Business is not money-making enterprises because many business are losing money / forced
to close down / money is not what the owners hope to make, instead how all this affects the use
of scarce resources which have alternative uses

Adjusting to changes

- Individual companies and whole industries rise and fall as a result of relentless competition
under ever changing conditions.

- At the heart of all of this is the role of profits - and of losses.

- Masses of changing details mean that the threat of losses hangs over even the biggest and
most successful businesses.

- Profits also rise and fall over time quickly

- When the companies introduce a product that consumers like may make large profits but those
profits attract more investments into existing companies and encourage new companies to form.

- When the price falls that profits turn into losses, companies go into bankruptcy

- Although corporations may be thought of as big, impersonal institutions, they are ultimately run
by humans who all differ from one another and have shortcomings and make mistakes.
Social Changes

- A/P (was leading grocery chain for its high quality and low prices -> change -> lost a lot of
money)

- This illustrates the dynamic nature of a price-coordinated economy and the role of profits and
losses.

- A/P lost customers because other chains now had lower cost than A/P and could sell for lower
prices.

- Supermarkets could be very profitable by charing prices lower than those in neighborhood
because of automobiles (helped consumers to buy everything at once), refrigerators (able to
stock up perishable items -> fewer trips to grocery store -> larger purchases each time), freezer
became widespread,

- A/P failed because other supermarket chains took A/P’s consumers away

- It is important to succeed in both eras in getting its groceries at the lowest prices as possible /
getting consumers

- American Airways went out in business as a result of increased competition

- Losses force businesses to change with changing conditions or find themselves losing out to
competitors who spot the new trend sooner.

- An economy based on prices, profits, and losses give decisive advantage to those with greater
knowledge and insight.

- Knowledge and insight guide the allocation of resources / but they need not be technological
or scientific for it to be economically valuable for the material well-being of the society.

- Businesses should make changes over time in order to survive.

- Montagomery Ward -> used the railway freight shipping services -> allowed to deliver its
products to customers at lower prices.

- A railroad agent Richard Sears began selling watches -> ended up creating a rival mail order
house -> became several times the size of Montagomery Ward.

- One of the biggest advantages of an economy coordinated by prices and operating under the
incentives created by profit and loss is that it can tap scarce knowledge and insights even when
most of the people do not have such knowledge or insights.
- The competitive advantages of those who are right can overwhelm the numerical advantage of
those who are wrong.

- James cash penny -> poor -? but this insights into the changing conditions -> forced Sears and
Montgomery Ward into doing things his way

- One of the greatest handicaps of economies run by political authorities is that insights which
arise among the masses have no such powerful leverage as to force those in authority to
change the way they do things.

- Those at the top -> stubborn -> hard to convince -> but big advantage of free market is that
you don’t have to convince anybody of anything.

- Penney -> x convince anybody of anything

Economic Changes

- It is a change within the management of firms in response to external economic changes.

- Things that we take for granted - cards -> ppl had no intention of accepting it as payments for
purchase. (Resisted)

- What is important is not the success or failure of particular individuals or companies, but the
success of particular knowledge and insights in prevailing despite the blindness or resistance of
particular business owners.

- An economy that has knowledge and insights -> advantage in the competition of the
marketplace -> this is an economy that has great advantage in creating a high standard of living.

- Don’t throw away knowledge and insights

Technological Changes

- Old Television is different from new tv.

- Kodak -> largest photographic company -> but new technology created new competitors ->
nikon canon appeared

- Kodak invented the digital camera - other companies saw its potential earlier and developed
the technology better.

- Clocks and watches depended on springs and gears -> the appearance of quartz time-keeping
technology -> more accurate and had lower costs -> led to a fall in old watches.
Changes in Business leadership

- The most overlooked fact about industry and commerce is that they are run by ppl who differ in
insights, foresights, dedication -> the companies they lead will differ in the efficiency with which
they perform their work.

- Although Toyota surpassed General Motors the world’s largest automobile manufacturer, it had
to stop production because of problems with their acceleration

- Neither quality leadership, nor any other kind of leadership, is permanent in a market economy.

- How much its efficiency can benefit consumers is more important than the fate of any given
business.

- Business leadership is a factor in the advance of the economy as a whole through the spread
of the impact of new and better business methods to competing companies and other industries.

- Rockefeller -> made the world’s largest fortune by revolutionizing the industry -> he shipped
his ol in railroad tank cars instead of barrels -> this was cost saving / he also hired scientists to
create new products

- Individuals are not key to the success / what is key is = the role of knowledge and insights in
the economy

- Leaders have hard time breaking the mold of their previous experience (Howard Johnson
failing to compete with Mcdonalds)

- Selecting managers can be as chancy as any other aspect of a business (Mcdonalds - first
attempt (ppl w/ business experience) failed - second attempt (married couple ) succeed

- The personal factor in the performance of corporate management is important (a death in the
family of a Danish CEO -? 9% decline in the profitability of the corporation)

- Market economies must rely not only on price competition but they must also find some way to
remove those business owners or managers who do not get the most from the nation’s
resources -> losses accomplish this

- After using that control to fire existing managers and replace them with a more efficient
management team, the value of the stock may then rise -> this means business is serving more
customers or offering them better quality or lower prices

- The economic functions which had seemed so easy and simple before to perform them now
seem almost overwhelmingly difficult.

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