lecture_chapter 2 samuelson 18e_797
TRANSCRIPT
1Syed Arshad Hussain -
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Markets and Governments in a Modern Economy
Chapter 2
Samuelson, Nordhaus 18e
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Markets & 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.
– Market System and Price• Prices serve as signals to producers and consumers.
– Prices coordinate the decisions of producers and consumers in a market
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Markets & Government in a Modern Economy
• What is a Market? Cont.
– How Markets Solve the Problem of the Three Economic Problems?
• By matching sellers and buyers (supply and demand) in each market, a market economy simultaneously solves the three problems of what, how and for whom.
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The Circular Flow of Economic ActivityHere goods and services flow clockwise: Labor services supplied by households flow to firms, and goods and services produced by firms flow to households.
Payment (usually money) flows in the opposite (counterclockwise) direction: Payment for goods and services flows from households to firms, and payment for labor services flows from firms to households.
Markets & Government in a Modern Economy
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Markets & Government in a Modern Economy
• What is a Market? Cont.
– Labor Market: The input/factor market in which households supply work for wages to firms that demand labor.
– Capital Market: The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
– Land Market: The input/factor market in which households supply land or other real property in exchange for rent.
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The Market System Relies on Supply & Demand to Solve the Trio of Economic
Problems
Chapter 2 Figure 2-1
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• Trade, Money and Capital
– Trade, Specialization, and Division of Labor
– Money: The Lubricant of Exchange
– Capital
Markets & Government in a Modern Economy
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• Trade, Money and Capital (cont.)
– Trade, Specialization, and Division of Labor• As individuals and countries become increasingly
specialized, they tend to concentrate on particular commodities and trade their surplus output for goods produced by others.
Markets & Government in a Modern Economy
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• Trade, Money and Capital (cont.)
– Money: The Lubricant of Exchange• Money is the universally acceptable medium of
exchange.
Markets & Government in a Modern Economy
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• Trade, Money and Capital (cont.)
– Capital• Inputs such as machinery, structures, and
inventories of goods in process.
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Governments have three main economic functions in a market economy.
• Efficiency– Imperfect Competition– Externalities– Public Goods
• Equity• Macroeconomic Growth
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Efficiency• Governments increase efficiency by promoting
competition, curbing externalities like pollution, and providing public goods.
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Efficiency (cont.)• Perfect Competition
– A market in which no firm or consumer is large enough to affect the market price.
• Imperfect Competition– When a buyer or seller can affect a good’s price.
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Efficiency (cont.)• Externalities
– Externalities (or spillover effects) occur when firms or people impose cost or benefits on others outside the marketplace.
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Efficiency (cont.)• Public Goods
– Commodities or services which can be enjoyed by everyone and from which no one can be excluded.
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Equity (fairness)• Governments promote equity by using tax and
expenditure programs to redistribute income toward particular groups.
Markets & Government in a Modern Economy
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• The Economic Role of Government
– Macroeconomic Stability and Growth• Governments use the tools of fiscal and monetary
policies to encourage economic growth.
Markets & Government in a Modern Economy
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Chapter 2 Table 2-1Markets & Government in a
Modern Economy