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Markets and Government in a modern economy

Rachel Yoo

on 28 April 2010

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Transcript of Chapter2

Chapter 2
Rachel Markets and Government in a Modern Economy What is a Market? A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services. Why Price important? It serves as signals to producers and consumenrs. It coordinates the decisions of producers and consumers in a market. Higher price tend to reduce demand, and increase supply. Lower price tend to increase demand and decrease supply. Equilibrium Market Equilibrium represents a balance among alll the different buyers and sellers.
At some prices, price excess supply exists (if quantiry supplied per period exceeds quantity demanded) then the price will tend to drop. If at some price, excess demand exists (if quantity demanded per period exceeds quantity supplied) then the price tend to rise. How markets solve
3 Economic problems? What
demand of consumers
profitability of a firm
high demand How?
competition among different producers
keep costs at a minimum price
maximize profit
most efficient methods For whom?
who is consuming
by how much depends
Consumers demand has to devetail with business supply of goods and services to determine what is ultimately produced. The market system deals out profits and lossed to induce firms to produce desired good efficiently. Adam Smith Invisible hand Under perfect competition and with no market failures, markets will make as many useful foods and services out of available resources as is possible. Trade, specializaion, and division of labour Specialization when people and countrieds consentrate their efforts aon a particular set of tasks. Division of labour Dividing production into a number of small specialized steps or tasks Increase the productivity of their resources Money Money is the medium of exchange. Proper management of the money supply is one of the major issues for government macroeconomic policy in all countries 1. Medium of exchange
2.Unit of account
3.Store of value Capital A produced factor of production, a durable input which is itself an output of the economy. Growth from sacrifice of current consumptions People are willing to save to abstrain from present consumption and wait for future consumption. Perfect
imperfect competition? Perfect:
A market in which no firm or consumer is large enough to affect the market price. Homogeneous product
small firms
no entry barriers
perfect information Imperfect:
When a buyer or seller can affect a good's price Externalities It occurs when firms or people impose costs or benefits on others outside the marketplace. Perfect competition
Monopolistic competition
Oligopoly Public goods Commodities which can be enjoyed by everyone and from which no one can be excluded. What is Equity? Markets do not necessarily produce a fair distribution of income. A merket economy may produce inequalities in income and consumption that are not acceptable to the electorate. Thank you!
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