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Principle of Microeconomics (Principles #5-8)

2 pages63 viewsSpring 2014

Department
Economics
Course Code
ECON 1116
Professor
Irena Tsvetkova

Page:
of 2
Principle of Microeconomics (Principles #5-8)
How people interact
Principle #5: Trade can make everyone better off
Rather than being self-sufficient, people can specialize in producing on good or
service and exchange it for other goods
Countries also benefit from trade and specialization
oGet a better price abroad for goods they produce
oBuy other goods more cheaply from abroad than could be produced at home
Principle #6: Markets are usually a good way to organize economic activity
Market: A group of buyers and sellers (Not necessarily in the same location)
“Organize economic activity”: Means determining
oWhat goods to produce
oHow to produce them
oHow much of each to produce
oWho gets them
Market economy: Allocates resources through the decentralized decisions of many
households and firms as they interact in markets
Father of economics: Adam Smith
oThe Wealth of Nations (1776)
oEach of these households and firms acts as if “led by an invisible hand” to
promote general economic well-being
oThe invisible hand works through the price system:
The interaction of buyers and sellers determines prices
Each price reflects the good’s demand curve value to buyers and the
cost of producing the good
oPrices guide self-interested households and firms to make decisions that in
many cases, maximize society’s economic well-being
Principle #7: Governments can sometimes improve market outcomes
Important role of government: Enforce property rights (with police, courts, etc)
If people are less inclined to work, produce, invest, or purchase if large risk of their
property being stolen
Market failure: When the market fails to allocate society’s resources efficiently
caused by market power
Priarig. System is disturbed
Causes of market failure
Externalities: When the production or consumption of a good affects bystanders
(pollution, price is too low, etc)
Market power: A single economic actor (or small group of actors) to have a
substantial influence on market prices

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