Instructor3Commentary

Instructor3Commentary - 1 INSTRUCTORY COMMENTARY Text...

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INSTRUCTORY COMMENTARY Text Reference: Chapter 3 Overview of the Market Economy 1. Chapter 3 focuses on the following important topics: A. The essential elements of a market economy. The essential elements of a market economy are: (1) private ownership of economic resources; (2) a limited economic role for government; (3) the use of money; (4) specialization and division of labor; (5) freedom of choice; and (6) the pursuit of self-interest. B. The identity (in value) of the upper and lower loops of the circular flow. The dollar values passing through the upper loop of the circular flow graph are identical to those passing through the lower loop. This occurs because profits are the very last item whose value is determined in the circular flow. Profits will assume whatever value is required to cause the upper loop and the lower loop to have the same value. (text, pp. 116-117) C. The dual role that households and business firms play in the circular flow. Households are buyers of goods and services in the upper loop and sellers of the services of the factors of production they own in the lower loop. Business firms are sellers of goods and services in the upper loop and buyers of the services of productive resources in the lower loop. (text, pp. 116-117) D. The way in which a market economy answers the questions of what to produce, how to produce it, and for whom it is produced. In a market economy the question of what to produce is answered in the first instance by the composition of household expenditures. If there are large expenditures on X and small expenditures on Y, then profit-maximizing firms will produce more X and less Y. The question how to produce is answered primarily by business firms as they make choices about which resources to employ in order to minimize production costs and earn maximum profits. The question of for whom the output is produced also is answered primarily by business firms; as they make decisions about which resources to 1
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employ, they also make choices about which households will receive the greater share of earned income. If very capital intensive production methods are selected, then the owners of capital resources will receive a larger share of earned income in the economy, and these households will have the greatest number of “dollar votes” to cast in the marketplace for goods and services. (text, pp. 472-473) E. The determinants of market demand for a single product. The determinants of market demand for product X are: (1) the price of X; (2) household incomes; (3) tastes and preferences; (4) the prices of related goods (complements and substitutes); (5) changes in expectations about future prices of X; and (6) the number of households in the market. (text, p. 54 and 56-61) F. The reasons why the price of X and the quantity demanded of X are inversely related. .
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Instructor3Commentary - 1 INSTRUCTORY COMMENTARY Text...

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