ISS LECTURE on Markets

ISS LECTURE on Markets - ISS 225: Markets1 February 2006,...

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ISS 225: Markets1 February 2006, p.1 The Prerequisites of Free Markets 1 Two Views of What Markets Are All About 2 First: 3 A “static” view of markets, as maximizing short-run efficiency; the focus is on exchange . 4 Following lecture: 5 A “dynamic” view of markets, as maximizing long-run adaptability and growth; the focus is on innovation and entrepreneurship . 6 In the short-run: What is required to have a competitive market which efficiently produces and allocates goods and services? 7 A particular set of conditions is required for competitive markets to efficiently produce and allocate goods and services: 8 Particular kinds of legal conditions. 9 The existence of money as an exchange medium. 10 Particular kinds of numbers of producers and consumers. 11 Particular kinds of goods or services. 12 Production and consumption have particular kinds of characteristics. 13 Actors have perfect information about each other’s knowledge, preferences, and actions. 14 The existence of entrepreneurs. 15 When all of these conditions are met, goods and services can be “efficiently” produced and allocated. 16 Without some or all of these conditions, goods and services will be inefficiently produced and inefficiently allocated. 17 What Do We Mean by “Efficiency”? 18 The Role of “Efficiency” in Competitive Markets 19 Efficiency means that there exists no possible exchange that leaves somebody better off and nobody worse off. 20 Every change from an “efficient” state of affairs will leave somebody worse off. 21 In a competitive market, producers and consumers will bargain their way to a state of affairs such that no further exchange can be made that leaves at least one person better off and no one worse off. 22 There are no wasted opportunities for mutual improvement. 23 Legal Conditions for Competitive Markets
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ISS 225: Markets1 February 2006, p.2 24 The legal right to own property: 25 Without the right to own property, a person might find it not worthwhile to make things or buy things if someone else could simply take it away from them without paying for it. 26 Both producers and consumers need to have this right. 27 Individual firms have the right to produce goods: 28 Without the right to produce goods without someone else’s approval (such as the government), the firm will be unable to change the amounts it produces in response to demands for its product from consumers. 29 Under socialist forms of economic management, firms do not automatically have rights to produce whatever products they want. 30 Individual workers have the rights to their own labor: 31 Without rights to what results from your own labor, you might not find it worthwhile to work very hard. 32
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This note was uploaded on 03/19/2008 for the course ISS 225 taught by Professor Williams during the Spring '07 term at Michigan State University.

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ISS LECTURE on Markets - ISS 225: Markets1 February 2006,...

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