551-3 - CHAPTER 3 - SUPPLY, DEMAND AND THE MARKET PROCESS...

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CHAPTER 3 - SUPPLY, DEMAND AND THE MARKET PROCESS Given the first two principles of economics (We live in a universe of scarcity and We have unlimited desires), we have to make choices about how to allocate scarce resources. Resources can be allocated through the Market or the Government, see page 53. Economics is largely the study of resource allocation (analysis of decision making, choice), and can be used to study both how the Market allocates scarce resources and how the Government allocates scarce resources. For example, the important economic concept of OPPORTUNITY COST applies equally to the market and government decisions. Also, since perfection is never an option: Under what conditions might the Market fail and under what conditions might the Government fail? Fail = fail to achieve efficient or optimal results from the overall viewpoint of society as a WHOLE. Failure to maximize overall social welfare of society. Chapters 3 and 4 cover the Market Economy. CHAPTER 3: QUOTES - "From the point of view of physics, it is a miracle that 7m New Yorkers are fed each day without any control mechanism other than sheer capitalism." Also quote by Hayek. Market mechanism is so efficient at coordinating econ activity, that we take it for granted. Consider: 1. You could move to any area of the country tomorrow and there would most likely be housing available for rent or purchase. There are 67m families and people are moving all the time and find housing. How is it that housing is available? 2. You go into a grocery store and find the stuff you want most of the time. How does the stuff you want just happen to be there? You don't place an order and tell the grocery store when you are coming, yet it is always there. 3. Every day there is enough food for 7m people in NYC. We have never heard of a food shortage in NYC, or a surplus, so it must be that just the right amount food ends up there every day. How does just the right amount of food get there, and how does NYC avoid shortages and surpluses? How does all this econ activity just happen without any direction or control? There are 300m people, 67m families, 135m workers and 7m companies in US. How does $11T of annual economic activity get coordinated? What prevents constant surpluses and shortages? Soviet story - they thought that there was a central command post somewhere sending out orders. They couldn't believe that our economy could operate so efficiently without some type of central planning. We look at a pure market economy and analyze the market process, even though most societies have some combination of government intervention. We assume that the market is totally free from intervention. Prices are set by market forces without interference, for example. Hayek: "Spontaneous Order." Think of the English language or the Internet. Who is in charge of the
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This note was uploaded on 01/23/2012 for the course FIN 551 taught by Professor Staff during the Spring '11 term at University of Michigan.

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551-3 - CHAPTER 3 - SUPPLY, DEMAND AND THE MARKET PROCESS...

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