request from students for clarification
we ended last lecture with a tension between 1) identifying & defending your personal interest; 2)
sacrificing for the national interest.
-How can we tell when the national interest is really at stake?
-How can we tell when a policy solution helps the national interest or is actually re-distribution
of wealth (or protectionism) in disguise? (e.g. tariffs, subsidies, regulation, etc.)
Answer: market failures are often cited as situations in which the government has a clear role for
advancing the public interest
via sound policy.
-Question: Why are markets good?
(but what do we mean by this? less waste…supply meets demand…no surplus or
(no person or organization has power to determine supply, demand, price,
distribution, production. No one has to tell )
What’s a market?
-A market is created whenever potential sellers of a good or service are brought into contact with
potential buyers, and a means of exchange is available.
- In classical economics, a market is characterized by:
informed, rational individuals involved in the free exchange of goods, services, & capital,
resulting in economic efficiency
Focus on individuals: rational, free, secure, informed, have property rights
-(in special cases: a single prevailing price for commodities of uniform quality).
The state of an economy such that no one can be made better off (without
somebody else being made worse off). This requires:
(output is being produced at the lowest cost possible),
(resources are allocated to the production of goods/services most valued by
(output is distributed such that consumers do not wish to spend their incomes
in any other way).
Given a set of alternative allocations and a set of individuals, a movement from one allocation to another
that can make at least one individual better off, without making any other individual worse off, is called
a Pareto improvement or Pareto optimization. An allocation of resources is Pareto efficient or Pareto
optimal when no further Pareto improvements can be made.
(quantities of major economic factors don’t change; no shocks or disturbances)
(things change over time; technology, population, forms of organization)
Dynamic gains from trade:
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