market_efficiency - Market Efficiency Commerce 394...

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Market Efficiency Commerce 394: Government and Business Keith Head Sauder School of Business September 17, 2004
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Lecture 3: Learning Objectives After reading Brander Chapter 3 and attending this lecture, students should know how to explain why “markets” are an attractive system relative to the alternatives. correctly employ the concepts of “consumer sovereignty,” “economic freedom,” “perfect competition,” “invisible hand,” “first welfare theorem.” distinguish between Pareto inefficiency and X-inefficiency. diagram dead-weight loss (DWL). Diagram the consequences of market interventions: price floors and ceilings (rationing coupons), quotas
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Economic systems Supply/Demand decisions: Decentralized Centralized (competition) (planning) Private Market capitalism Monopoly (private enterprise) capitalism Ownership: Public Market socialism * State-directed Socialism * : current economic system in China is formally titled “Socialist market economy with Chinese characteristics.” State sector (30%–70% of GDP) with public ownership status by law along side a private sector mainly engaged light industry.
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Market economies Definition: A market economy is one in which prices and quantities for most goods and services are determined in competitive markets. In a market economy prices are determined by supply and demand, demand represents aggregate preferences of consumers ( consumer sovereignty ) goods are supplied by individuals/firms pursuing profitable opportunities ( economic freedom ) In a mainly market economy “government intervention” must be justified case-by-case. Under socialism, it is the normal state, and market interactions are the exception.
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Two related concepts economic freedom : consenting adults can engage in mutually advantageous transactions. consumer sovereignty : the ultimate determiner of what will be made and sold and consumed is the consumer herself. Aside: Did Apple CEO Steve Jobs believe in consumer sovereignty? He famously said, “It’s not the consumers’ job to know what they want.” and also in 1994, “Unfortunately, people are not rebelling against Microsoft. They dont know any better.”
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Limitations on consumer sovereignty Examples of government policies that either prevent consumers from getting what they want or try to change their preferences?
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Restrictions on economic freedom Even in highly market-oriented economies there are some voluntary transactions that are not allowed.
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