ECON 101 Lecture Notes - Lecture 2: Efficient-Market Hypothesis, Rational Expectations, Market Failure
30 Apr 2018
School
Department
Course
Professor
Economics 101
Lori Leachman
Part 2 • Discussion
• Conservative Thinking - Classical - Freshwater (comes from University of Chicago)
o Individual self-interest is dominant
o Reliance on markets; markets are self-regulating
o Setting rules/laws of market and enforcing them; monetary policy (supply-oriented)
▪ Dislike discretionary policy
o Say’s Law - supply creates its own demand
o Focus on AS - believe in the EMH (Efficient Market Hypothesis)
▪ EMH - all information is in price; rational expectations & few market failures
(externalities)
o Rational Expectations (uses past information and model to forecast future)
▪ Economic agent is very sophisticated
o Long run oriented
• Liberal Thinking - Keynesian - Saltwater (along east coast)
o Social welfare is dominant
o Markets are imperfect; lots of sources of market failure
o Set rules and proactively regulate economy and engage in discretionary policy; fiscal policy
o Problems with imperfect information
o Focus on AD
o Adaptive Expectations (does not forecast future; bases decisions solely on past information)
▪ Economic agent is less sophisticated
o Short run oriented
• Sources of Market Failure (ignored by Classicals)
o Externalities - by products
▪ Negative: pollution and second hand smoking; push costs onto others - taxes
▪ Positive: public health care, vaccination, education - subsides
o Public goods - pricing public goods that are collectively consumed; cannot assign price; no firm
wants to produce
o Information problems
▪ people can be ignorant & biased to perfect information
▪ asymmetric information (not everyone has same information)
▪ interpretive biases - people read & interpret things differently (wording... etc)
o Concentration of power
o Growing inequality
o Inadequate demand
find more resources at oneclass.com
find more resources at oneclass.com
