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Chapter 8

ECON-2086EL Chapter Notes - Chapter 8: Invisible Hand, Microeconomics, Macroeconomics

Economics / Science Èconomique
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Chapter 8 Part I The Power of the
Private Sector
The Price System and the Pursuit of Profit
The private sector includes privately owned businesses, corporations and proprietorships. The public
sector includes federal, provincial, and municipal levels of government and Crown corporations.
Sometimes, economic activity is carried out by public-private partnerships. It is stated here that the
private sector uses price mechanisms and the desire for profits to form the market to decide levels of
output, prices, quality, etc. For example, the production of gasoline employees many people. They do not
do this for the benefit of other but simply the benefit of themselves (profit). They were not told to do so,
they simply desired profits. “We get gasoline by making all of the people engaged in the production
process better off. It is a voluntary exchange, which benefits all parties”. Profit is seen here as a net-
benefit that was earned by giving something up. Prices and profits sends signals to the market. For
example, increased profits will bring more competition to the market to obtain the new-found profits.
Prices are seen here a signal for producers and consumers alike. Consumers can change their habits due to
a price increase. For example, war in the Middle East decreases oil supply, gasoline prices increase. The
consumer does not know why the prices went up but know they do. They change their behaviour due to
the higher prices now. The “invisible hand” is important here to allocate the most efficient and optimal
outcome for all.
The Pursuit of Votes and Bigger Budgets
If the public sector controlled the market, they would centrally make decisions on what was produced, at
what amount, and at what price. The market prices would not adjust as it would under the private sector.
High quality goods would not be made. In Canada, we vote democratically and the outcome is our desires
of public goods. Unlike the way we act when we go out and buy goods from the store. However, the
public sector politicians and bureaucrats act in their own self interest and not in the best interest of the
people. In order to get re-elected, the politicians will make decisions that benefit them or the groups that
got them elected. As well, politicians will make things worse than they are to help gain larger staff and
bigger budgets rather than optimizing the populations welfare. Special interest groups and lobbyists spend
money and time influencing politicians to adhere to their agenda. Also, when the government is deciding
the prices, it does not allow for signals to be sent amongst the market. Therefore, the government has a
hard time keeping the economy healthy and prosperous.
Private Sector Competition Versus Government Monopolies
When the government controls the production of a good or service, by law, they are sometimes the only
producer and no competition exists. However, in the private sector, other firms try to emulate their profits
and provide competition. This competition results in price battles (price competition), higher quality
products, and innovation (non-price competition). Government monopolies are shielded from this
competition. The only monopolies that tend to exist overtime are those run by the government as it
shields itself from competition.
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