A market distributes goods to the highest bidder

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A market distributes goods to the highest bidder. Individuals who are willing and able to pay the most for a good tend to get it in a pure market economy. Smith's astute perceptions will be discussed more fully in the chapters to come. Principle 7: Governments Can Sometimes Improve Market Outcomes The invisible hand will only work if the government enforces property rights. Definition of property rights: the ability of an individual to own and exercise control over scarce resources. There are two broad reasons for the government to interfere with the economy: the promotion of efficiency and equity. Government policy can be most useful when there is market failure. Definition of market failure: a situation in which a market left on its own fails to allocate resources efficiently. Definition of externality : the impact of one person's actions on the well-being of a bystander.
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Definition of market power : the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. Module 1.3 - How the Economy As a Whole Works Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services Differences in living standards from one country to another are quite large. Changes in living standards over time are also great. The explanation for differences in living standards lies in differences in productivity . Definition of productivity: the quantity of goods and services produced from each hour of a worker's time. High productivity implies a high standard of living. Thus, policymakers must understand the impact of any policy on our ability to produce goods and services. Principle 9: Prices Rise When the Government Prints Too Much Money Definition of inflation: an increase in the overall level of prices in the economy. When the government creates a large amount of money, the value of money falls. Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment Most economists believe that the short-run effect of a monetary injection is lower unemployment and higher prices. An increase in the amount of money in the economy stimulates spending and increases the quantity of goods and services sold in the economy. The increase in the quantity of goods and services sold will cause firms to hire additional workers. An increase in the demand for goods and services leads to higher prices over time. Some economists question whether this relationship still exists. The short-run trade-off between inflation and unemployment plays a key role in the analysis of the business cycle. Definition of business cycle: fluctuations in economic activity, such as employment and production.
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Learning Module #1: Summary Learning Module Objectives By the end of this module, students should understand: That economics is about the allocation of scarce resources. Economics is the study of how society manages its scarce resources. That individuals face trade-offs.
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