EC 111 Lecture Notes - Lecture 4: Invisible Hand, Creative Destruction, Allocative Efficiency

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silvercicada472

4 Jun 2018

School

University of Alabama

Department

Economics

Course

EC 111

Professor

El- Karaksy

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Chapter 3 – Individual Markets: Demand and Supply

Characteristics of the Market System

• Private individuals and firms own most of the private property (land and capital).

• Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and

businesses to obtain, control, use, and dispose of this property.

• Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and

economic growth.

• Property rights extend to intellectual property through patents, copyrights, and trademarks.

• Freedom of enterprise and choice exist.

• Freedom of enterprise means that entrepreneurs and businesses have the freedom to obtain and use

resources, to produce products of their choice, and to sell these products in the markets of their choice.

• Freedom of choice means:

• Owners of property and money resources can use resources as they choose.

• Workers can choose the training, occupations, and job of their choice.

• Consumers are free to spend their income in such a way as to best satisfy their wants (consumer

sovereignty).

• Self-interest

• Self interest is one of the driving forces in a market system. Entrepreneurs try to maximize profits or

minimize losses; resource suppliers try to maximize income; consumers maximize satisfaction.

• As each tries to maximize profits, income, satisfaction, the economy will benefit if competition is present.

• Competition among buyers and sellers is a controlling mechanism.

• Large numbers of sellers mean that no single producer or seller can control the price or market supply.

• Large number of buyers means that no single consumer or employer can control the price or market demand.

• Depending upon market conditions, producers can enter or leave industry easily.

• Markets and prices

• A market system conveys the decisions of the many buyers and sellers of the product and resource

markets.Recall the demand and supply model in Chapter 3.

• A change in the market price signals that a change in the market has occurred.

• Those who respond to the market signals will be rewarded with profits and income.

• Reliance on technology and capital goods

• Competition, freedom of choice, self-interest, and the potential of profits provide the incentive for capital

accumulation (investment).

• Advanced technology and capital goods uses the more efficient roundabout method of technology.

• Specialization

• Division of labor allows workers to specialize.

• People can take advantage of differences in abilities and skills.

• People with identical skills may still benefit from specialization and improving certain skills

• Specialization saves time involved in shifting from one task to another.

• Geographic specialization: Regional and international specialization take advantage of localized resources.

• Use of money as a medium of exchange

• Money substitutes for barter, which requires a coincidence of wants. (I may want what you produce but you

may not want to exchange for what I have.)

• Willingness to accept money in place of goods permits 3-way trades (or multilateral trades). See Figure 4-1

and examples in text.

• Floridians give money to Nebraskans for wheat who give money to Idahoans for potatoes who give money to

Florida for oranges.

• Foreign exchange markets permit Americans, Japanese, Germans, Britons, and Mexicans to complete

international exchanges of goods and services.

• Detroit autoworker produces crankshafts for Buicks. If the worker were paid in crankshafts, he would have to

find grocers, clothing retailers, etc., who would be willing to exchange their products for a crankshaft. It is

much more efficient to use money wages than to accept one's wages in crankshafts!

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Related Questions

The primary costs of FDI to host countries are:

		Loss of sovereignty and patriotism
		Adverse effects on competition and exports
		Capital outflow
		Loss of sovereignty, adverse effects on competition, and capital outflow

____ suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantage by specializing in the production of certain goods or services.

		The radical view
		The free market view
		Pragmatic nationalism
		Expropriation

What are the benefits of FDI to home countries?

		Repatriated earnings from profits from FDI.
		Increased exports of components and services to host countries.
		Learning via FDI from operations abroad.
		All of these answers

When one firm enters a foreign country through FDI, its rivals are likely to follow by undertaking additional FDI in a host country to:

		Create knowledge spillover
		Discover a new market for its goods
		Overcome and combat market failure through FDI
		Acquire location advantages or neutralize the first moverâs location advantages

Most countries practice:

		Pragmatic nationalism
		Free market based FDI
		Government embracing radical view
		French patriotism

FDI may be viewed as a reflection of firm motivation to extend firm-specific capabilities abroad and their responses to overcome imperfections and failures.

		True
		False

Most countries practice a totally "free market" view.

		True
		False

8. Outsourcing is the process of turning over an organizational activity to an outside supplier, located in a foreign country, which will perform it on behalf of the local firm.

		True
		False

Financial, physical, and technological resources and capabilities are all tangible assets.

		True
		False

A firm's resources and capabilities are tangible assets a firm uses to choose and implement its strategies.

		True
		False

An example of low power distance would be when subordinates address their bosses on a first-name basis.

		True
		False

Benchmarking is an assessment as to whether a firm has resources and capabilities to perform a particular activity in a manner superior to competitors.

		True
		False

A country with low-masculinity has a more subtle differentiation between the gender roles.

		True
		False

Setting up subsidiaries abroad so the work can be performed in-house but in the foreign location is also called captive sourcing.

		True
		False

Managers in low uncertainty avoidance countries rely more on experience and training than managers in high uncertainty avoidance countries who rely more on rules.

		True
		False

Informal institutions include laws, regulations, and rules.

		True
		False

The United States is often classified as a collective society.

		True
		False

A pure market economy characterized by the "invisible hand" of market forces is noted by

		John Stuart Mill
		Adam Smith
		Aristotle
		Amatya Zen

Culture is defined in the text as:

		The communication between members of similar location.
		The collective programming of the mind, which distinguishes the members of one group or category of people from another.
		The main component of formal institutions.
		The attitudes and behaviors characteristic of a particular social group or organization.

When an expat employee returns to her or his current employer but the employer does not provide attractive opportunities, she/he often may be hired by a competitor firm. Why?

		Competitor firms are also interested in globalizing their business.
		Former expats bring instant expertise and experience.
		Competing firms will pay a higher premium for expertise.
		All of these answers

The government taking a "hands-off approach" is known as:

		Laissez faire
		Command economy
		Mixed economy
		Liberal approach

Expatriate managers make ideal candidates for top management positions.

		True
		False

____ are defined as rights associated with the ownership of intellectual property.

		Patents
		Copyrights
		Trademarks
		Intellectual property rights

In a collective society:

		Family units are highly valued.
		Being an entrepreneur is a popular mindset
		Being different than your neighbor is important.
		Outsiders are easily trusted.

Which of the following definitions best defines an expatriate manager?

		A manager who works outside his or her native country
		A manager of great expertise
		An ex-manager rehired for advisory purposes
		None of these answers

Question 26 pts

Which of the following is not a reason why specialization and trade are beneficial to society?

	Specialization fosters learning by doing, thus lowering the unit-costs of products
	Firms and workers become less dependent on others for producing goods and services

	The total output of economic goods may be increased even without any increase in resources
	Scarce resources are utilized more efficiently by exploiting differences among them

Question 27 pts

Laissez-faire capitalism limits the government's economic functions to the following, except:

	Protecting private property rights
	Establishing a legal environment to enforce contracts among individuals

	Setting prices of individual goods and services
	Preventing individuals and firms from coercing others

Question 28 pts

A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:

	Roundabout production
	A coincidence of wants

	Freedom of enterprise
	Division of labor

Question 29 pts

The market system is said to be characterized by "consumer sovereignty." This is because:

	A sovereign government determines which consumer goods will be produced
	Firms must match their production decisions to the consumers' choices

	The prices of consumer goods are regulated by a sovereign government
	Consumer goods are considered to be more important than capital goods

Question 30 pts

Consumers express self-interest when they:

	Seek the lowest price for a product
	Reduce business losses

	Exclude others in their thinking
	Collect economic profits

Question 311 pts

Refer to the above graph with three demand curves. An "increase in quantity demanded" would be illustrated by a change from:

	Point 5 to point 1
	Point 4 to point 1

	Point 2 to point 5
	Point 4 to point 6

Question 32 pts

The table below shows the weekly demand for hamburger in a market where there are just three buyers.

Refer to the above table. At a price of $6, the weekly market quantity demanded for hamburger is:

	17
	23

	24
	18

Question 33pts

If farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the near future, then this would cause a(n):

	Movement up along the current supply curve of corn
	Movement down along the current supply curve of corn

	Leftward shift in the current supply of corn
	Rightward shift in the current supply of corn

Question 34 pts

Which of the following will not cause the supply curve to shift?

	A technological change in the production of the good
	A change in the prices of other goods that producers could be producing

	A change in the costs of resources needed to produce the good
	A change in the price of the good

Question 35 pts

All of the following would affect the position of the supply curve for cranberries, except the:

	Price of agricultural land for cranberries
	Cost of fertilizers for cranberry production

	Popularity of cranberry drinks
	Development of a new pest control for cranberries

Question 36 pts

When high-school and college graduates apply for jobs in the labor markets,

	Job applicants and employers are both "buyers".
	Job applicants are the "sellers" while employers are the "buyers".

	Job applicants and employers are both "sellers".
	Job applicants are the "buyers" while employers are the "sellers".

Question 37 pts

Refer to the figure above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S₁ to S₂?

	A decrease in consumer incomes, assuming corn is a normal good
	The development of a more effective insecticide against corn rootworm

	An increase in the price of fertilizer
	A change in consumer tastes away from cornbread

Question 38 pts

Which is of the following statements is correct?

	If demand increases, then price will decrease
	If demand decreases, then price will decrease

	If price decreases, then demand will decrease
	If price increases, then demand will decrease

Question 39 pts

Which would be a likely cause of an increase in the demand for pizza?

	A decrease in the price of hamburger sandwiches
	A health report showing eating pizza reduces stress

	A reduced desire for take-out and fast-food dining
	A decrease in the prices of cheese, pepperoni, and mushrooms

Question 40 pts

A market for a product reaches equilibrium when:

	Price falls further after there is a shortage
	The price rises further after there is a surplus

	Buyers intend to buy a quantity equal to the quantity that sellers intend to sell
	The actual quantity bought by buyers equals actual quantity sold by sellers

Question 41 pts

A higher price reduces the quantity demanded for a product because:

	Individuals can afford less of the product and will switch to substitutes
	The financial assets of individuals increase

	Individuals will buy more of the product and less of its substitutes
	The purchasing power of individuals increases

Question 42 pts

The idea of the Law of Demand, as applied to electric cars, assumes which of the following to be constant?

	Price of electric cars
	How much sellers are charging customers for electric cars

	Price of gasoline cars
	Quantity of electric cars demanded by buyers

Question 43 pts

Use the following graph of the demand for coffee:

Refer to the above diagram of three demand curves for coffee. An increase in the price of coffee, other factors constant, would cause a:

	Movement from point a to point b
	Movement from point b to point a

	Shift from D₁ to D₂
	Shift from D₁ to D₃

Question 44 pts

Which of the following factors will decrease the current demand for a product?

	A decrease in the current price of a complementary product
	A decrease in the current price of a substitute product

	An increase in the current price of a substitute product
	An expected increase in the future price of the product

Question 45pts

In competitive markets, a surplus or shortage will:

	Cause shifts in the demand and supply curves that tend to eliminate the surplus or shortage
	Cause changes in the quantities demanded and supplied that tend to intensify the surplus or shortage

	Cause changes in the quantities demanded and supplied that tend to eliminate the surplus or shortage
	Never exist because the markets are always at equilibrium

Question 46 pts

Which of the following would cause a leftward shift in the supply curve for car washes?

	A decrease in taxes on car washes
	An increase in the price of car washing equipment

	A decrease in the price of water
	An increase in the number of cars in the city

Question 47pts

The market system automatically corrects a surplus condition in a competitive market by:

	Raising the price of the commodity in question while decreasing the quantity demanded
	Raising the price of the commodity in question while increasing the quantity demanded

	Reducing the price of the commodity in question while increasing the quantity demanded
	Reducing the price of the commodity in question while decreasing the quantity demanded

Question 48 pts

A leftward shift of the supply curve for oil in the United States is most likely to result from:

	A decrease in the world price of oil
	An increase in the costs of exploration and drilling for oil

	An increase in the subsidy for oil exploration and drilling
	A decrease in the fees that oil companies must pay for drilling licenses

Question 49 pts

A fall in the price of milk, used in the production of ice cream, will:

	Decrease the supply of ice cream
	Have no effect on the supply of ice cream

	Increase the supply of ice cream
	Cause a movement along the supply curve of ice cream

Question 50 pts

Refer to the above graph, which shows the market for beef where demand shifted from D₁ and D₂. The change in equilibrium from E₁ to E₂ is most likely to result from:

	An increase in the cost of cattle feed
	A decrease in consumer incomes

	A decrease in the tax on beef products
	An increase in the price of pork

EC 111 Lecture Notes - Lecture 4: Invisible Hand, Creative Destruction, Allocative Efficiency

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