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Principles of Economics- Mankiw (5th) 524

Principles of Economics- Mankiw (5th) 524 - 542 PA R T N I...

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542 PART NINE THE REAL ECONOMY IN THE LONG RUN discussed economic interdependence in Chapter 3, production in market economies arises from the interactions of millions of individuals and firms. When you buy a car, for instance, you are buying the output of a car dealer, a car manu- facturer, a steel company, an iron ore mining company, and so on. This division of production among many firms allows the economy’s factors of production to be used as effectively as possible. To achieve this outcome, the economy has to coor- dinate transactions among these firms, as well as between firms and consumers. Market economies achieve this coordination through market prices. That is, mar- ket prices are the instrument with which the invisible hand of the marketplace brings supply and demand into balance. An important prerequisite for the price system to work is an economy-wide respect for property rights. Property rights refer to the ability of people to exercise authority over the resources they own. A mining company will not make the effort
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