ECN_203_3_Introduction_to_Markets(sp08)

ECN_203_3_Introduction_to_Markets(sp08) - Ch. 3...

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Ch. 3 – Introduction to Markets Market -- an arrangement wherein buyers and sellers voluntarily exchange goods and services. Why do markets exist? Develop a model to predict market outcomes-- demand and supply analysis
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Why do markets exist? Division of labor -- tasks involved in the production of a good or service is divided among workers ( within- industry ) or each worker focuses on the production of a single good ( i.e. specialization– across industry ). Why divide labor? Must be benefits-- increased productivity
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Why is specialization more productive? Adam Smith (1776) gave 3 reasons for increased productivity: 1. “the increase in dexterity” 2. saves “time that is commonly lost going from one species of work to another” 3. more likely to be inventive Drawback-- potential for “ignorance”
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Why do markets exist? Specialization leads to surpluses of for each producer (gains). What should producer do with the surplus? Trade for other goods. Gains from trade -- the increased utility made possible by specialization (through the division of labor) and trade (exchange of surpluses).
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Gains from Trade Absolute advantage -- the ability to produce more of a good than the person or country one trades with using the same amount of resources.
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Gains from Trade No specialization: Shirts=12+7=19 CDs=8+14=22 Each specialize: (12 shirts) x (2 hours)=24 shirts (14 CDs) x (2 hours)= 28 CDs Table-- Absolute Advantage (Production/Hour) Shirts CDs me 12 8 you 7 14
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This note was uploaded on 04/18/2008 for the course ECN 203 taught by Professor Evensky during the Spring '07 term at Syracuse.

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ECN_203_3_Introduction_to_Markets(sp08) - Ch. 3...

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