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The invisible hand works through the price system by

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- The invisible hand works through the price system by: a) The interaction of buyers and sellers determines prices b) Each price reflects the good’s value to buyers and the cost of producing the good. c) Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well being. 7. Governments can Sometimes Improve Market Outcomes - Important role for govt: Enforce property rights (with police, courts etc) - People are less inclined to work, produce, invest or purchase if large risks of their property being stolen. - Market Failure: When the market fails to allocate society’s resources efficiently. - Cause of Market Failure: a) Externalities: When the production or consumption of a good affects bystanders (e.g. pollution) b) Market Power: A single buyer or seller has substantial influence on market price (e.g. monopoly) *In such cases, public policy may promote efficiency. - Govt. may alter market outcome to promote equity. - If the market’s distribution of economic well being is not desirable, tax or welfare policies can change how the economic “pie” is divided. ECONOMISTS AS A SCIENTIST - Economist play two roles 1. Scientists: Try to explain the world 2. Policy advisors: Try to improve it - As scientists economists employ the scientific method : the dispassionate development and testing of theories about how the world works. ASSUMPTIONS AND MODELS - Assumptions simplify the complex world, make it easier to understand. Example: To study international trade, assume two countries and two goods. - Assumptions are unrealistic but they are simple to use and they give us useful insights about the real world. - Model: A highly simplified representation of a more complicated reality. Economists use models to study economic issues.
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1. Our First Model: The Production Possibilities Frontier - The Production Possibilities Frontier: A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology. Example One: a) We have two goods, computers and wheat. b) One resource= labor (measured in hours) c) The economy has 50,000 labor hours per month available for production. d) Producing one computer requires 100 hours of labor e) Producing one ton of wheat requires 10 hours of labor Line= PPF (it is the boundary of what we can do) -By definition there can be no points outside of the PPF. -Points interior to the PPF are attainable, but if the point is within the interior of the PPF, then the economy is being inefficient and not using their resources to the best of their abilities. If production is on the PPF line then the economy is producing efficiently. - Q:
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The invisible hand works through the price system by a The...

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