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Lecture 3

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University of Toronto St. George

Week 3 September-25-13 9:22 AM Review from Week 2: Key Terms  Equilibrium  Price Mechanisms  2 Fundamental of Welfare Economies  We should organize our society in a market- Smith o Various ways to organize markets : Mechanisms o We could have someone in charge- Exchanges taking place but someone is deciding how these resources are be delegating o Market Mechanisms- a group of people exchanging is the best way:  Markets are a better exchange systems: 2 Justifications o Efficiency Based Justification: in a market system more people needs are satisfied , a greater well-being for all o Debrueu: 2 Fundamental Theories of Welfare Economies 1. Every Market allocation will be Parto- efficient 2. Every P.E allocations we adjust the distributions of goods  Mathematical proofs shows the market will be good under certain conditions- Perfect Markets  No info is symmetric  Market for all goods  Market powering  No metropolis o Parto- Efficiency: cannot improve the position of 1 person without making a person least wealthy o Parto- Improvement: improving the position of 1 person without affecting another person's wealth  Ex. ex. 5,5 10,5 5,10 o Markets do not make it equal- we should have markets to create wealth distribution to all to increase the greater good- market leads to social improvements o Liberty Based Justification: In a market system there are less liberty constraints  Difference: Liberty based- economy liberties are good even though they reduce the total wealth- o Efficiency Based- committed to efficiency there will be more liberty constraints but it wont undermine the total wealth  Trade offs: if we give more liberties there will be a negative impact on efficiency (wealth) and vice versa  Price Signal/Structure: Price Mechanisms o Supply and Demand - supply increases demand decreases and vice versa o The point where they intersect -equilibrium o Too many supply the price will reduce o Less goods price will increase o Price and quantities are the 2 factors that are important 1. Delivering P.E Market Outcomes: o Perfect Market: a business actor needs to give customers all the info they need to know (guidelines) - contradicts no info is symmetric - corporation has responsibilities- o Imperfect Market: trust confirmations o Freeman and Gatheure accepts this 2. Beyond P.E Market Outcomes Week 3: What is Corporation Firm: bigger category- organizations that appear in markets- corporation is a specific type of Firms A. Why Firms Emerge and How they Transform Reading 1: Coase: The Nature of Firm  Insider and Outsider of the Firm (MAKE A CHART) o Center Control- extra firm transaction(Market) - NO vs. Intra firm transaction- Yes o Allocation of resources: Price Mechanism and Entrepreneur-coordinator o Offer and Demand of Mechanisms : o Nature of Contract: Separate for each transaction- obedience within certain limits o Type: Market Transactions- Administrated transactions  Economy exchanges in a corporation-ex. receive a salary, to do work in the company  Different from Markets: Leaders decide what employees do - allocation of resources do not have market mechanisms, they have entrepreneur-coordinator- performed outside of price mechanisms  Extra-firm transactions - changing to a different firm - free agent in the market- can bargain a salary, ask conditions  Intra-firm transactions: changing positions in a firm  Not a binary distinction  Firm exchanges (inside) are different then Firm exchanges in the market o Isla
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