Class Notes—Fundamental Unit

Market Failures, Property Rights, Economic Growth, Incentives, Productivity

Roles of Government are covered in reading/cartoon activity.

Market Failures

  • A market______when it brings together a ______and ______to make a mutually ______in a way that ______the parties involved.
  • There are 4 well-recognized conditions under which market failure occurs:
  • A market transaction affects ______parties not ______in the ______

NOTE: A classic example of a negative externality is pollution, where people who do not purchase the good whose production created the pollution must nevertheless face polluted air or water.

  1. The ______market is unable to provide the good or service (because it’s not profitable)
  2. Two examples of this are national ______and ______protection.

NOTE: It is very difficult for the private market to charge individuals for these services. This means that this role falls to the Government. Although not a market failure, it is interesting to note that the Federal Government is also unable exclude individuals from these services for failure to pay their taxes. The difference is that the Federal Government is not expected to make a profit from their services

  1. A______firm that operates without ______and has the power to increase the ______it charges to ______
  2. Imperfect ______

NOTE: Perfect information would practically mean that all consumers know all things, about all products, at all times (including knowing the probabilistic outcome of all future events), and therefore always make the best decision regarding purchase.Ideally all market participants would have perfect information, and it is often argued that markets fail when buyers and sellers have imperfect information. But buyers and sellers always have less than perfect information. Indeed, any attempt to acquire perfect information would be inefficient because it would soon begin costing more than it was worth. Also, it should be emphasized that the prices that emerge from market exchanges provide buyers and sellers with far more information relevant to their decisions than would otherwise be available.

Property Rights

•Property rights refer to the legal ______of ______, which include the right to ______, ______and ______them

•Property rights are essential to the ______in a______economy

•An additional, essential roles of government in a market-oriented economy is to protect property rights

•When goods, including everything from cars to groceries, are bought and sold, a property right is ______from one party to the other

•Your ownership of your own______, that is, your property rights in your own labor, is what gives you the right to be ______for your ______

NOTE: Market systems cannot function well without clearly defined, well enforced property rights because property rights send clear signals on who is rewarded for caring for the resource and who is liable if it is used poorly. When property rights are unclear or not enforced, the resource will be overused in the marketplace. Examples such as the markets for elephant ivory and caviar demonstrate how a resource can be overused and depleted when property rights are not clear. Other examples like chickens and cattle demonstrate how a resource can be used aggressively but not depleted if property rights are clear

Without property rights and ownership, firms would lack any reason to build factories, produce and innovate, because they wouldn't be able to keep what they made or earned. Similarly, people and firms would have a greatly reduced incentive to save or invest, because they wouldn't be confident of receiving the future value from doing so.

First, property ownership encourages wise use of the resource. Are you more concerned with changing the oil in a car you own or a car you rent? Second, private ownership encourages people to use their property productively because this increases its value. Third, private sellers will try to use their property for the benefit of others because this increases its value. Because they will benefit from a higher price, people improve their homes in ways that make the homes more attractive to potential buyers. Finally, owning property encourages its wise development and conservation for the future. Why are there more cattle than whales? Why is commonly owned property often abused?

Economic Growth

•Economic growth refers to the ability of the economy to ______its total real ______or real GDP, or its real output per person.

  • i.e. Increasing the production of goods and services over time

• Economic growth is measured by ______in the level of real gross domestic product (______).

Economic growth comes from FOUR main sources:

  1. improvements in the ______, ______and ______level of the workforce (human capital)
  2. greater amounts of ______capital, that is, plants/factories and equipment per worker
  3. discovery of new ______resources, or better ______of existing ones
  4. improved ______

•Economic growth is critical to job-creation and economic well-being.

•Economic growth slows down as the economy approaches its peak and becomes negative as it goes into recession.

•Economic growth begins increasing back toward zero as the economy approaches its trough and becomes positive as it begins its recovery.

•A target annual growth rate of 3 to 4 percent in real GDP is generally considered to be reasonable and sustainable.

Real GDP per capita may be a better indicator of economic growth than the percentage change in real GDP alone because it takes into consideration the population growth of the country.

Incentives

•An incentive is a ______or ______that ______a ______or action by consumers, workers, firms or other participants in the economy

What FOUR things provide incentives?

  1. Higher or lower ______
  2. Specifically, higher ______give consumers an incentive to ______less and firms an incentive to ______more
  3. Higher and lower ______
  4. Many people will work longer or harder for______wages, but firms will try to hire a ______quantity of workers if wages are higher
  5. Interest ______
  6. People have a greater incentive to ______money to purchase a home or a car or use a credit card if interest rates are lower.
  7. Greater ______

•Economists take the principle that people respond to incentives very seriously.

•In every decision, incentives matter

NOTE: A common error of students is to consider financial incentives as the only important incentives to influence individual choices. While financial incentives can be important and are easy to measure, nonmonetary incentives, such as loyalty, stability, love, good grades and public recognition, also influence individual choices.

Productivity

•Productivity is measured as the quantity of ______per unit of ______.

•the number of pencils one worker can make in one hour measures how productive that worker is

•An ______in productivity means producing more goods and services with the same amount of ______(one worker making more pencils today in one hour than she did yesterday illustrates an increase in that worker’s productivity)

•An increase in productivity can also mean producing the ______amount of goods and services with______resources

•Or it can be a ______of the two possibilities

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