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Lecture 4

ECN 104 Lecture Notes - Lecture 4: Vise, The Incentive, Decision-Making

Course Code
ECN 104
Teresa Fung

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ECN 104 Week 4
The Demise of the Command System
o The Coordination Problem
o The outputs of many industries serve as inputs to other industries, the failure of
any single industry to achieve its output target caused a chain reaction of
o Bottleneck and stoppages became the norm not the exception
o The major success indicator is quantitative target that central planner assigned
o Production costs, quality and product mix are secondary considerations
o The Incentive Problem
o If central planner misjudged persistent shortages and surpluses
o No fluctuation in prices and profitability to signal more or less of certain products
was desired
o No incentive to adjust production in response to the shortages and surpluses
o No reward for innovation lacked entrepreneurship
Anatomy of an Economy:
o Decision making units
o Households
o Firms
o Government
o Markets
o Goods and services
o Factors of production
Demand and Supply:
o An institution or mechanism that brings together buyers (demand) and sellers (suppliers)
of particular goods and services
o Local, national, international
o Many forms:
o Gas station
o Roadside stand
o E-commerce site
Competitive Markets:
o A large number of independent buyers and sellers
o Standardized goods
o No individual can dictate the market price
o Everyone is a price-taker
o Examples: wheat market, currencies market
o A schedule or a curve that shows the various amounts consumers are willing and able to
purchase at each of a series of possible prices, during some specified period of time
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