Chapter 2 Macro

Chapter 2 Terms and Questions for Discussion

Market- An arrangement whereby buyers and sellers interact to determine the prices and quantities of a commodity. Some markets take place in physical locations; other markets are conducted over the telephone or are organized by computers, and some markets now are organized on the Internet.

Market equilibrium- The balancing of supply and demand in a market or economy characterized by perfect competition. Because perfectly competitive sellers and buyers individually have no power to influence the market, price will move to the point at which it equals both marginal cost and marginal utility.

Perfect competition- Term applied to markets in which no firm or consumer is large enough to affect the market price. This situation arises where (1) the number of sellers and buyers is very large and (2) the products offered by sellers are homogeneous. Under such conditions each firm faces a horizontal demand curve.

Adam Smith's invisible-hand doctrine-A concept introduced by Adam Smith in 1776 to describe the paradox of a laissez-faire market economy. The invisible-hand doctrine holds that, with each participant pursuing his or her own private interest, a market system nevertheless works to the benefit of all as though a benevolent invisible hand were directing the whole process.

Division of labor- A method of organizing production whereby each worker specializes in part of the productive process. Specialization of labor yields higher total output because labor can become more skilled at a particular task and because specialized machinery can be introduced to perform more carefully defined subtasks.

Factors of production- Productive inputs, such as labor, land, and capital; the resources needed to produce goods and services.

Capital- One of the triad of productive inputs. Capital consists of durable produced items that are in turn used in production.

Private goods- A commodity whose benefits are indivisibly spread among the entire community, whether or not particular individuals desire to consume the public goods. For example, a public-health measure that eradicates polio protects all, not just those paying for the vaccinations.

Efficiency-Absence of waste, or the use of economic resources that produces the maximum level of satisfaction possible with the given inputs and technology. A shorthand expression for Pareto efficiency.

Equity- The ownership interest of shareholders in a corporation.

1.) What determines the composition of national output? In some cases, we say that there is "consumer sovereignty," meaning that consumers decide how to spend their incomes on the basis of their tastes and market prices. In other cases, decisions are made by political choices of legislatures. Consider the following examples: transportation, education, police, energy efficiency of appliances, health-care coverage, television advertising. For each, describe whether the allocation is by consumer sovereignty or by political decision. Would you change the method of allocation for any these goods?

In all of these cases, a combination of consumer choice and government directives or incentive plans can determine the ultimate allocation of resources. No I wouldn't change the method of allocation for any of these goods.

2.) When a good is limited, some means must be found to ration the scarce commodity. Some examples of rationing devices are auctions; ration coupons, and first-come, first-served systems. What are the strengths and weakness of each? Explain carefully in what sense a market mechanism "rations" scarce goods and services.

Allocations are not always practical, ration coupons hold prices artificially low, and first come first served leads to high opportunity costs of standing in line. A market "rations" goods to those consumers who can afford them.

3.) This chapter discusses many "market failures," areas in which the invisible hand guides the economy poorly, and describes the role of government. Is it possible that there are, as well, "government failures," government attempts to curb market failures that are worse than the original market failures? Think of some examples of government failures. Give some examples in which government failures are so bad that it is better to live with the market failures than try to correct them.

Yes