The role of the market
Markets: are institutions that bring together buyers and sellers to exchange goods and
Market: is a process by which households decisions on consumption, firm’s decisions on
production and sales and worker decisions on working hours are all reconciled by the
adjustment in prices.
Note: price adjustments are the key to ensuring that scarce resources are allocated to produce
what society wants.
The command economy: when a government office decides what is to be produced, how it is
produced and for whom. (Central planner makes resource allocation decision)
Free market: when the governments do not intervene, and do not regulate unduly
Invisible hand: is the assertion that the individual pursuit of self interest within free markets
will allocate resources efficiently from a societal viewpoint. This means that individuals
perusing their self interest will solve the, what how and for whom problems.
The mixed economy: Government and the private sector jointly solve economic problems. The
government influences decisions through taxation, subsidies, transfers and the provisions of
particular services. It also regulates the extent to which individuals may pursue their own
interests. Goods and services are supplied by both the private sector and the government.
Positive and normative economics
Positive economics: Studies objective or scientific explanations of how the economy functions.
Aims to understand and generate predictions about how the economy may respond to changes and policy initiatives. Focus on facts and cause and effect relationship. (Studies how the
Normative economics: Offers recommendations that incorporate scientific investigation and
value judgment. Incorporates a pe