Chapter 1 – the market system
1. Market systems
Intro to economics / • Basic economic problem• Wants, resources and scarcity
• Resource allocation / i. Define: wants, resources (FoPs), scarcity and opportunity costs
ii. Describe/outline: how opportunity costs arise in resource allocation, why factors are not 100% mobile
iii. Explain/distinguish/draw: use a PPF to explain opp costs, growth and the benefits of trade, rising opp costs due to factor immobility
iv. Evaluate/discuss: how the PPF might shift outwards due to more/better factors…etc
v.
Economies and markets / • Planned, free market and mixed economies
• What is a market? / i. Define: planned, mixed and competitive market (CM) economies, markets
ii. Describe/outline: characteristics of planned, mixed and CM
iii. Explain/distinguish/draw: explain how CM allocate resources (supply and demand and the signalling function of price)
iv. Evaluate/discuss: why CM seem to have worked better than planned economies
v.
Successes and failures / • What markets do well
• How and why competitive markets fail / i. Define: “success” in terms of resource allocation, costs, innovation…etc
ii. Describe/outline: how supply and demand ‘solve’ the basic economic problem
iii. Explain/distinguish/draw: CM successes (choice, lower costs and prices, innovation, good res all…) and failures (negative externalities, lack of public and merit goods, income distribution issues…)
iv. Evaluate/discuss: ‘fairness’ and ‘efficiency’ in CM versus planned economies
· Basic economic problem...scarcity and choice...opp costs
·
· Definition of a market
o Buyers and sellers in contact
· Functions of a market
o Solve the basic economic problem and allocate resources
· Supply and demand
o The interaction of suppliers and consumers creates a market price which then serves as a signal to both.
· Market succeses
o Markets work well for goods such as clothing, food and currencies (e.g. the US dollar or Indonesian Rupiah)…
· Market failures
o …but fail to a certain extent for goods such as education, health care, civil defence. It is clear that no economy can be perfectly free-market orientated – all economies are a mixture of planning and free/competitive markets.
Terms you need to be able to use:
· Basic economic problem: what, how and for whom to produce (solved by markets)
· Factors of production: land, labour, capital and the entrepreneur
· Resource allocation: the opportunity cost issues shown
· Factor mobility: why a convex PPF is more realistic
· PPF: opp costs and shifting
· Pareto optimum: when all resources are optimally used the economy is on the PPF
· Definition of a market
o Potential buyers and sellers in contact
· Function of a market: solve the basic economic problem
· Supply: The amount suppliers/producers are willing and able to put on the market at different prices (during a period of time)
· Demand: The amount consumers are willing and able to purchase on the market at different prices (during a period of time)
· Market successes: Good resource allocation, innovation, lower prices, increased productivity
· Market failures: Pollution, under-provision of goods such as education and health care, overproduction of goods such as alcohol and tobacco, inequality issues