richard gill explains.have to understand a little about the price system itself. in this connection economists usually make some assumptions about human behavior-- namely, that people generally tend to act in their own self-interest. consumers might want all the goods they could get but most of them have limited budgets. they must choose one good over another. in making these choices, they try to maximize their own welfare. the same is true of producers. they try to maximize their firm's profits. it will be in their own self-interest they will maximize their profits, if they use more efficient productive methods and produce goods that consumers will buy. let us examine the price system. suppose a new computer is introduced at $450. suppose that this is a low price, meaning that long lines of consumers want to buy one. under the influence of the bidding of these consumers the price rises to $750. that price change has two effects. it will encourage other producers to produce similar computers. it will also,

we asked analyst richard gill.ge profits in a capitalistic system according to economist joseph schumpeter, derive from one source-- innovation. they're the superabundant rewards given to those who are clever enough, daring enough, enterprising enough, to come up with something new. the apple computer story is a letter-perfect example of what schumpeter was talking about. a few points about this process-- first, innovation decisions are quite different from the expected rate of return calculations we discussed earlier. how can you calculate a rate of return when you're doing something new? it's doubtful the interest rate plays any major role here. second, the entrepreneurs weren't risking big money. they sold a van and a calculator. their risks were far more subtle, a sense of failure, perhaps, reputations, schumpeter might have said. third, the huge profits did not last that long. ibm and all their brotherhood quickly swooped down into the personal computer market. entrepreneurial profits are often huge but also t

we asked richard gill why. curves and the union-determined supply curve in the newspaper industry. for a prosperous paper its situation before the settlements would appear like this. its demand curve is strongly affected by the printers' productivity. the supply curve is really the union-determined wage. we have equilibrium at this wage with this number of printers. now two things happen. unions demanded higher wages. so the supply curve of labor shifted up here. but also the times introduced more highly automated typesetting machinery. this greatly raised the productivity of printers. since the demand curve for labor reflects printers' productivity, the new demand curve might look like this. here's the final situation. the times is basically ok. wages are higher. employment is lower. but the productivity increase made possible by automation leaves the firm profitable. when it came to relatively unprofitable papers like the herald tribune however, the situation was quite different. they were fairly close to the

wesk economic analyst richard gill to explain the economic thinking behind social security. social security program is a bit like god, country, and yale. you have to be for all of them -- well, perhaps not yale -- but you have the feeling that they all work in rather mysterious ways. the reason we're for social security is that it has, in fact, achieved its central purpose -- providing for the needs of the elderly. poverty among our senior citizens, a deep concern in the 1930s, has been substantially reduced in the present day. the reason social security seems mysterious is really twofold. first, the system doesn't work at all in the way we were taught to believe it would. the idea seemed to be that an average citizen -- let's call him peter -- would deposit his and his employer's payroll taxes in a fund which would keep growing over the years. at retirement, this same peter would use these accumulated funds to live on. in fact, the way it works is that young peter pays into a fund which is immediately used to pay already elderly paul. the notion of a huge accumulating trust

economic analyst richard gill and i will examine that question on this edition of "economics u$a." david schoumacher. you can see the forces that control a farmer's economic wellbeing at work here at this farmers' market. taken together it demonstrates a concept that economists call "perfect competition." in other words, every farmer who raises, say, tomatoes, is in competition with every other farmer who raises tomatoes. the market determines the price through the interplay of supply and demand. so the farmer is a "price taker," not a "price maker," and he tries to produce at the lowest possible cost and produce as much as he can as long as he can turn a profit. at the beginning of the 20th century, the farmers felt secure in their calling as they toiled to supply all the foods a growing nation demanded. so why, just 20 years later, were so many farmers forced to leave the land? their problems began with the entry of the united states into world war i. president woodrow wilson challenged the nation's farmers to dramacally increase food production. "food will win the war," he told

we asked economic analyst richard gill if that holds for the rest of the economy.se of the american automobile dustry especially in recent years is competition between a relatively small number of firms. we don't have a monopoly which means a single firm in control of the industry. we don't have pure competition which means thousands of firms selling identical products. we have a few firms in control what economists call an oligopoly. now, in general, oligopolistic firms like to avoid price competition. people can get hurt that way. and this automobile story brings out two ways firms can avoid price competition -- one, by fiddling around in various ways with the special features and gadgetry associated with their product, what economists call "product differentiation." and two, by advertising and trying to convince consumers that their special version of this product is necessary for their survival, or at least for eir personal or social success. now, this kind of competition raises all sorts of problems for the economic analyst. when you have product differentiati

with the help of our economic analyst richard gill we'll find out on this edition of "economics usa." david schoumacher. we like to think of our economy as one that runs on competition. for instance, we can choose the brand ofasoline we buy. if one station sets its prices too high thene can simplygo across the stet for a lower price. if enough drivers pass the high-price station by, sooner or later it goes out of business. of course, if in order to attract business a station sets its prices too low and can't cover costs, sooner or later it'll go out of business, too. but what happens to prices if one company, or one person, controls all the gas stations? that was what the country faced in 1890. the company was standard oil -- the man was john d. rockefeller. this was the infant oil industry john d. rockeller saw after the civil war. drilling equipment was hand- and foot-operated in those days and available cheap. anybodcould in the o rh, and anybody did. with thousands of small-scale prospectors drillers, and refiners competg, the supply of oil was plentiful. prices were low, and so w

we asked economic analyst richard gill.ne principle economists don't thk too highly of is what we might call the principle of perfection. it's a natural approach. we have these harmful external effects let's get rid of them no matter what the cost. the 1973 plan for los angeles was a little like this. smog is harmful to your health. let's get rid of it, virtually outlaw driving for six months of the year. there are countless examples of this approach. nuclear generating plants involve certain hazards. let's ban them completely. alcohol leads to driving fatalities. let's bring back prohibition. the trouble with this approach is not only that it usually doesn't work -- the los angeles plan had to be modified -- but that it's bad economics. in our society, clean air has become a product. it brings us certain benefits but it also has certain costs of production. and what economists want to do is to measure these benefits against these costs, taking, of course, all external effects into account. these look like ordinary supply a