Chapter 3: Book Outline Flashcards
Market:
Institution through which buyers and sellers meet to trade goods and services.
Markets can be
virtual
Consumption
the realization of want-satisfying capabilities; when our pressing needs are being satisfied
Production
the creating of want-satisfying capabilities
By trading some of the good you have produced
you can access other goods that provide you with more utility
Exchange
transfer of a property right
Consumer Surplus:
difference between marginal value and the price
Producer Surplus:
Difference between marginal value curve and the price
Transaction Costs
Costs involved i using the price mechanism
Dead Weight Loss
potentially efficient trades that aren’t being made
It is the consumption between middlemen that reduces transaction costs and converts
dead weight loss into utility
Demand curves and supply curves both show
the relationship between changes in price and changes in quantity
Comparative statics:
use of the demand and supply diagram to see what will happen to price and quantity following changes in the underlying economic conditions
Factors that influence demand
- consumer tastes
- price of substitute goods
- income
- buyers’ expectations
- the number of consumers
Factors that influence supply are those that affect the costs structures facing producers
- technological change
- prices of factor inputs
- number of supplies
- suppliers’ expectations
- prices of all other goods
Key reason why the market ‘finds’ a new equilibrium following a shock
is because the price system adjusts to the new economic reality.
Prices allow our subjective values to find
social harmony
Price Controls
laws that set prices at certain levels
Ceiling
when prices are kept at their market-clearing rate
ex: rent control
Floor
When prices are kept above their market-clearing rate
arbitrary price floors
do not change the economic reality
glut
the difference between high supply and low demand - unemployment
anti-price gouging laws
designed to prevent prices from spiking following natural disasters and are intended to protect consumers for explitation
consequences of keeping prices at pre-emergency levels
creates incentives for people to hoard
reduces the incentive for suppliers to respond
price spikes
are signals market is working
beauty contest
where policymakers receive bids and make a judgement about which is best
asymmetric information
occurs when actors on one side of the market have better quality information than those on the other
two implications
- adverse selection
- moral hazard
George Akerlof
second hand car market, lemons
Michael Spence
Signalling: occurs when the better informed person takes costly actions to transmit information to the poorly informed
Joseph Stiglitz
Screening: occurs when the poorly informed elicit the well informed to reveal their characteristics
information economics typically says
- Markets work in theory
- The real world has frictions
- Solutions to market failures
market friction
is the norm
3 Schools of Thought
- Chicago - Markets work, use markets
- Keynesian - Markets fail, use government
- Austrian - Markets fail, use markets
