Micro Chap. 2

The balancing of supply and demand in a m..arket

Markets in which no firm or consumer is large enough to affect market

with each participant pursuing his or- her own private interest, a market system works to the benefit of all). With each participant pursuing his or her own private interest. A market system works to the benefit of all.

A method of organizing production whereby each group of people oncentrates ist efforts on a particular set of tasks.

Productive inputs that include all durable produced goods that are in tum used in production.

The use of economic resources that produces the maximum level of satisfaction possible with the given inputs and technology.

Involves issues of fairness in the distribution of income.

Amadeet structure in which a commodity is supplied by a single firm

Situations in which production or consumption yields positive or negative -effects on outside parties. (negative: pollution / positive: innovation, education, )

A. system of social safety nets for the elderly, poor, and jobless.

Combination of private enterprises working through the market palce and governemental taxation and programms. --> Market determines all prices in most individual sectors, governement steares overall economy with programs (taxation, spendings…)

A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods, services, and assets.

Prices coordinate the decisions of producers and consumers in a market. Higher prices tend to reduce consumer purchases and encourage production. Lower prices encourage consumption and discourage production. Prices are the balance wheel of the market mechanism.

A market equilibrium represents a balance among all the different buyers and sellers.

Like a farmer using a carrot and a stick to coax a donkey forward, the market system deals out profits and losses to induce firms to produce desired goods efficiently.

Adam Smith discovered a remarkable property of a competitive market economy. Under perfect competition and with no market failures, markets will squeeze as many useful goods and services out of the available resources as is possible. But where monopolies or pollution or similar market failures become pervasive, the remarkable efficiency properties of the invisible hand may be destroyed

Specialization and trade are the key to high living standards. By specializing, people can become highly productive in a very narrow field of expertise. People can then trade their specialized goods for others’ products, vastly increasing the range and quality of consumption and having the potential to raise everyone’s living standards.

Money is the medium of exchange. Proper management of the financial system is one of the major issues for government macroeconomic policy in all countries.

Economic activity involves forgoing current consumption to increase our capital. Every time we invest—building a new factory or road, increasing the years or quality of education, or increasing the stock of useful technical knowledge—we are enhancing the future productivity of our economy and increasing future consumption

We have highlighted some key features of a modern economy: specialization and the division of labor among people and countries create great efficiencies; increased production makes trade possible; money allows trade to take place efficiently; and a sophisticated financial system allows people’s savings to f ow smoothly into other people’s capital

(or spillover effects) occur when firms or people impose costs or benefits on other outside the marketplace

Markets do not necessarily produce a fair distribution of income. A market economy may produce inequalities in income and consumption that are not acceptable to the electorate

Macroeconomic policies for stabilization and economic growth include fiscal policies (of taxing and spending) along with monetary policies (which affect interest rates and credit conditions). Since the development of macroeconomics in the 1930s, governments have succeeded in curbing the worst excesses of inflation and unemployment.

This new system, called the welfare state, is one in which markets direct the detailed activities of day-today economic life while government regulates social conditions and provides pensions, health care, and other necessities for poor families.

The debate about government’s successes and failures demonstrates that drawing the boundary between market and government is an enduring problem. The tools of economics are indispensable to help societies find the golden mean between an efficient market mechanism and publicly decided regulation and redistribution. The good mixed economy is, perforce, the limited mixed economy. But those who would reduce government to the constable plus a few lighthouses are living in a dream world. An efficient and humane society requires both halves of the mixed system—market and government. Operating a modern economy without both is like trying to clap with one hand.

Taste and Preference, number of consumers, price of related goods, income, expectations

Substitution effect, Income effect, Law of diminishing marginal utility