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based on law of demand.Characteristics of Market Demand/ Supply Curves and Equilibrium 1. aggregation of marginal cost curves of suppliers. Market Demand Curve: (collection of pairs of prices and quantities. aggregate of demands of individuals. show how much buyers willing to purchase at given prices. how much market participants prepared to sell at various prices. upward sloping because marginal cost of production increase as production increases . businesses and government. based on the law of supply. downward sloping (the more of a good a consumer possesses the less he will value the last or marginal unit of the good) 2. Market Supply Curve: (Collection of pairs of prices and quantities.
we can be sure that it will be equal to the valuation that the marginal consumer puts on his or her last unit of purchase. Market Equilibrium: ((i) price at which consumers able to buy all they wish. P also lies on the demand curve. (iv) So.Characteristics of Market Equilibrium 3. . (iii) Eq. sellers able to sell all they wish (ii) eq. (vi) Equitable as those who consume goods must pay the marginal cost of production of those goods. consistent with MC of production and with valuation that consumers put on the last unit of purchase (v) Goods produced upto and not beyond the point where MC= Price (vi) Efficient as no other allocation of resources could produce more of one good without reducing the output of another. price lies on the S curve and S curve is the aggregation of MC curves of suppliers.
perfectly inelastic. increase in consumer demand results in increased output. rate of return on K rise. (iii) Long term: S curve more elastic (flat). . windfall profits.A Shift in Demand Curve 4. law of diminishing returns. MP of labor down. A Shift in Demand Curve/Increased income: ((i) short run S fixed. sharp increase in P. increase in P encourage existing producers to increase output. on average each worker working with less capital. change in demand reflected in price change. only variable input labor not capital increased. no economic profits only normal profits. (ii) Medium term S curve moderately elastic. higher than average rate of return on K attracts new K /investment into the industry. increase in prices only reflects increase in MC.
When historically committed capital is depleted by depreciation it will not be replaced until average rates of return rise to the economy wide levfel. market prices go up. S curve shifts left. A Shift in Supply Curve: (i) decrease in supply. windfall profits to the remaining producers. .A Shift in Supply Curve 5. rate of return in industry below the level of economy at large. S curve shift right. incentives to channel new investment /K into the industry (ii) Increase in supply. rate of returns in industry above the level of economy at large. new investment diverted from industry to other uses. market price goes down.
(ii) For supplier a trade-off between wage money and leisure time. (viii) The process equitable because each worker is paid the amount by which he increases the social product. produce an efficient outcome for the economy as a whole. but each would be prepared upto that point.Factor Markets Factor Markets (i) Individuals offer their labor to employer that offers highest wages. which would . (vi) No employer would offer more than its marginal product. (v) Both efficiency and fairness. . because of the law of diminishing marginal returns.in its turn. (iii) Demand curve for labor is downward sloping. (iv) Employer will hire labor up to the point where the contribution that the marginal worker makes to revenues (marginal revenue product) equals the wage that must be paid. The worker is paid the contribution that he makes to the revenue of the enterprise.(vii) Workers employed in their socially highest value use.
Rent accrues to supplier because of ownership of a specific factor of production.Characteristics of a Market System Characteristics of the Market System (i) Disequilibria are self correcting. disequilibrium. . compared to central planning. (v) Opposes Concentration of Power and encourages competition. under competitive system. new investment in oil exploration) (ii) minimize the need for information flows. new sources of supply. back to equilibrium by early 80s. (iv) relative prices reflect relative costs (P=MC). (homes more insulated. tendency of price driven to MC of production. less energy intensive techniques. energy substitutes. 1970s oil shock. car engines smaller. (individual actors need to know info required to max its own welfare) (iii) Provides stimulus for innovation / high rates of return to innovators (single supplier/innovator will make excessive profits/economic rent. the productive innovation. The consumer must be prepared to pay the costs of the inputs used in the production of the marginal unit of the good.
law enforcement.Market Institutions: The Government. . social resources can be saved if needless duplication can be avoided. housing) (iv) Govt. role in collection and dissemination of info justified on efficiency grounds) Govt. Production Functions of the Government: ((i) Government production of pure public goods (not excludable. Govt. (ii) Government production of merit goods. information gathering costly. public health). But. health. Production of information as a public good (better info result in better decisions to enhance efficiency of market system. health (as a redistributive and egalitarian measure. not diminishable: defense. food safety/ standards) 2. and because of externalities/spillovers) (iii) Government function of redistribution. did not produce. education. doctor qualifications. Function of Regulation of Products: economizes (reduces) information costs for consumers (drugs. free rider problem if govt. income transfer egalitarian purposes (education. Functions of the Government 1.
rather than providing cash to purchase the appropriate amount in private markets. The Redistributive Function of the government (Progressive taxation. Hence element of paternalism is used to justify the public provision of such goods. social security): (i) A large part of government spending consists of redistributive expenditure (ii) Redistributive expenditures can take 2 forms (a) direct transfer of cash payments (old age pension. free medicine. Redistributive Functions 3.The Gov. . higher levels of unemployment . Redistribution in kind: If given control over resources the receivers would dispose off them in a fashion that would favor short term gratification over long tem well being. Demerits of Redistributive Policies (i) redistribution payments reduce flexibility of labor markets (ii) reduce urgency of job search (iii) lower incentives to find work (iv) encourage higher wage demand (v) Thus. UE benefits. welfare. welfare) (b) Redistribution may take an in-kind form such as provision of subsidized housing. unemployment benefits. free education.
redistribution from rich to poor lowers the social marginal propensity to save and reduces the chance of an under-consumption trap. (b) some economists advocate domestic redistribution as an antidote to recession © it is a fact that developed nations managed to steer clear of major recessions since the inception of mass redistribution programs. solidifies institutions that are beneficial to economic growth (b)Redistribution can lower social problems leading to saving on expenditure (crime or remedial education) (v) Social control: (a) redistribution as a tool in struggle to maintain social peace and stability (b) potentially disruptive elements of society are bought off. Take a dollar from a rich and give it to a poor. (iii) Social Contract: Citizenship or residence endows everyone with rights to a minimum standard of living (iv) Increase of social productivity: (a) By elevating social cohesion. by providing generous pensions and goods (c) a substitute for expenditure on conventional aspects of law enforcement. (vi) Shared Growth: Growth that benefits only a few is likely to be unstable because it leads to loss of social unity. social well being will increase. Redistributive Policies Merits/Justification for Redistributive Policies: (i) Utilitarianism: (a)The more one has of a good the less it is valued at the margin. .(b) Intrinsic value of a dollar is greater to a poor person than to a rich one.Merits of Gov. enhancing welfare of both givers and receivers. (ii) Altruism: Giving is twice blessed. (vii) Demand Stabilization: (a) in so much as the less well off show a higher marginal propensity to consume than the better off.
. since the marginal utility of money declines as income increases.Stabilization Functions of the Govt. Monetary Stabilization Function of the Govt. those imposed on people and firms (direct taxation) and those levied on goods (indirect taxation) (b) Progressive tax: the average tax rate rise as individual or household’s base of the tax (income. 4. The central bank/FED attempts to stabilize the economy by changing money supply/ interest rates. expenditure. (c) Progressive taxation justified on moral and ethical grounds. The Stabilization functions of the government Fiscal Stabilization through government expenditure and taxes) (a) Taxes 2 types. wealth) increases.
MS=Dec. May be unduly austere placing burden on less well off. (Recession (increase MS). respond largely to narrow financial community from which they spring. CB/FED functions (i)clearing bank (ii) Promulgator and enforcer of financial regulations (iii) Bankers bank/lender of last resort (iv) protect foreign exchange value of currency (v) control money supply (Incr. (v) Chairman appointed for a period of 4 years.Financial Institutions: The Central Bank/ The Federal Reserve System CB/FED Structure: The federal reserve act 1913 established (ii) 12 federal reserve districts (iv) controlled by 7 member board of governors appointed for a period of 14 years. Buy bonds) CB/FED Tools: (Open Market Operations (buy/sell bonds).RRR. impartial decisions if politicians prevented from influencing) Against: (CB answer to no one. Discount rate. . DR. Inflation (decrease MS) CB/FED Independence: For: (tough job. Reserve requirement. Dec.
Can$ depreciate. supply of US dollar down. (ii) In Mexican Peso market: US demand for Mexican goods up. demand for Can $ down. Exports/Imports and Exchange Rate: (i) In Canadian dollar market: US demand for Canadian goods down. US supply of US$ up. . Peso appreciate. US$ depreciate. US demand for peso up. US$ appreciate.The Foreign Exchange Markets Sources of Demand for dollar: (i)foreigners want to buy US goods (ii)foreigners want to invest in USA (iii) speculators think $ will go up in value (Iv)government thinks $ is too low in value Sources of Supply for dollar: (Americans want buy foreign goods (ii) Americans want investment abroad (iii) speculators think $ will go down in value (iv) government think $ too high in value.