The Complexity of Modern Economies Flashcards
What is an economy?
An economy is a system in which scarce resources—labour, land, and capital—are allocated among competing uses.
Who organized the economy in a free market?
A great insight of early economists was that an economy based on free-market transactions is self-organizing.
How is a market economy self-organizing?
A market economy is self-organizing in the sense that when individual consumers and producers act independently to pursue their own self-interests, the collective outcome is coordinated—there is a “spontaneous economic order.”
Who initiated the beginning of modern economics?
Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. Now referred to by most people simply as The Wealth of Nations, it is considered to be the beginning of modern economics.
What is efficiency?
Loosely speaking, efficiency means that the resources available to the nation are organized so as to produce the various goods and services that people want to purchase and to produce them with the least possible amount of resources.
What is the “invisible hand” that guides a market economy?
Instead it refers to the relatively efficient order that emerges spontaneously out of the many independent decisions made by those who produce, sell, and buy goods and services. The key to explaining this market behaviour is that these decision makers all respond to the same set of prices, which are determined in markets that respond to overall conditions of national scarcity or plenty.
How dose self interest serve an economy?
Individuals generally pursue their own self-interest, buying and selling what seems best for them and their families. They purchase products that they want rather than those they dislike, and they buy them when it makes sense given their time and financial constraints. Similarly, they sell products, including their own labour services, in an attempt to improve their own economic situation.
How do incentives contribute to an economy?
When making such decisions about what to buy or sell and at what prices, people respond to incentives. Sellers usually want to sell more when prices are high because by doing so they will be able to afford more of the things they want. Similarly, buyers usually want to buy more when prices are low because by doing so they are better able to use their scarce resources to acquire the many things they desire.
How dose self-interest and incentives determine market prices and quantities?
With self-interested buyers and sellers responding to incentives when determining what they want to buy and sell, the overall market prices and quantities are determined by their collective interactions. Changes in their preferences or productive abilities lead to changes in their desired transactions and thus to fluctuations in market prices and quantities.
What are factors outside of self-interest and incentives that can motivate individuals?
Of course, individuals are not motivated only by self-interest. For most people, love, faith, compassion, and generosity play important roles in their lives, especially at certain times. Behavioural economists devote their research to better understanding how these motivations influence individuals’ economic behaviour.
What are the tree types of decision makers that operate in any economy?
Three types of decision-makers operate in any economy.
- Consumers
- Producers
- Government
What do we consider to be consumers?
Sometimes we think of consumers as individuals and sometimes we think in terms of families or households. Consumers purchase various kinds of goods and services with their income; they usually earn their income by selling their labor services to their employers.
Who are the producers in an economy?
Producers may be firms that are interested in earning profits or they may be non-profit or charitable organizations. In any case, producers hire workers, purchase or rent various kinds of material inputs and supplies, and then produce and sell their products. In the cases of charitable organizations, their products are often distributed for free.
What is governments effect on an economy?
Like producers, governments hire workers, purchase or rent material and supplies, and produce goods and services. Unlike most producers, however, governments usually provide their goods and services at no direct cost to the final user; their operations are financed not by revenue from the sale of their products but instead by the taxes they collect from individual consumers and producers. In addition to producing and providing many goods and services, governments create and enforce laws and design and implement regulations that must be followed by consumers and producers.
What is a maximizer?
Economists usually assume that consumers and producers make their decisions in an attempt to do as well as possible for themselves—this is what we mean by self-interest. In the jargon of economics, people are assumed to be maximizers.
