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Midterm

ECON 2367.01 Study Guide - Midterm Guide: Classical Liberalism, Capital Accumulation, Product Differentiation


Department
Economics
Course Code
ECON 2367.01
Professor
All
Study Guide
Midterm

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EXAM #1 STUDY GUIDE
Note: any material below that we do not cover by 10/2 will not be on the exam.
Each question has one to three asterisks next to it. Asterisks denote the relative
importance of a question. However, just because a question has one asterisk does not
mean that it is unimportant. Many times questions with one or two asterisks are about
concepts that are vital to understanding other, more substantial, questions.
1) Discuss “political economy” with reference to the similarities and differences between
the subjects of politics and economics.*
Primary goal : (Econ) Prosperity (politics) Justice
Institutional Arena: (Econ) Market (Politics) Government
Primary Actor: (Econ) Individual (politics) Community
Economics is defined as the individual pursuit of prosperity through the
market
Politics is the communal pursuit of justice through government
Prosperity and Justice are dependent on each other. In order for
prosperity the society must be just. In a Just society many opportunities
are available allowing prosperity
While markets are the institution for economics markets also have
political affiliation through rules and regulations along with the fact
that many corporations exercise powers to sway government policy.
Government itself acts as an economical institution by providing public
services for the lowest possible cost and by using resources in the most
efficient way possible.
An individual is forced to play a role in the community and is effected
politically and economically in the community
An individual also has the power to persuade the community so both
are inter locked.
With that being said you can’t distinguish between politics and
economy so the best way to describe each is to combine them as
Political economy
2) In what sense are markets political institutions? Evaluate the strengths and weaknesses
of markets in terms of freedom, equality, and social order.**
Although the market is usually viewed as an economic institution, it also
performs important functions in achieving the political goal of justice
Strength Freedom- Individual have the right to make choices concerning
employment, place of residence, consumption patterns, and social
relationships.
Weakness The market provides only commodities that can be sold at a profit
and therefore fails to respond to demands for goods such as national defense,
a clean environment, or public transportation
Strength By placing much of the responsibility for personal income in the
hands of individuals, the market distributes the benefits and burdens of
society’s productive activities in a manner seemingly independent of political
authority

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Weakness Concentration of wealth and power typically appear in a market
economy either because technological conditions favor large producers over
smaller businesses or because individuals intentionally create large
organizations to suppress competition and gain some control over markets
Strength Social Order- The market fosters order by increasing specialization
of labor, so that formerly diverse and separate groups become mutually
dependent. When individuals benefit from market transactions, they have an
interest in treating each other respectfully
Weakness As individuals pursue their private interests, cohesive communities
and shared purposes are increasingly displaces by the pursuit of satisfaction
through consumption and ownership of commodities
3) In what sense are markets economic institutions? Evaluate the strengths and
weaknesses of markets in terms of efficiency, growth, and economic stability.*
The market is a system of exchanges in which individual choices to
supply or demand resources or products interact to determine prices
Strength Effciency- A perfectly competitive market will with some
exceptions, direct resources toward their most highly valued use,
resulting in a “pareto optimal” or efficient economy in chich no person
can be made better off without making someone else worse off
Weakness Competition is imperfect due to barriers to entry, immobility
of resources, lack of information, product differentiation, and
concentrations of power caused by both technical conditions of
production and the efforts of individuals to protect themselves from
competition. That and transaction costs reduce effciency
Strength Growth- The market is a powerful mechanism for increasing
both the availability and productivity of economic resources
Weakness Growth can be hindered by the inability to establish adequate
social and economic infastructure, lack of information so investors can’t
accurately asses the rick of an investment, and if the wealth becomes
concentrated enough the demand for goods will lack
Strength Stability- The market is extremely flexible in responding to
changing patterns of consumer preferences, technology, and resource
availability. Through the price mechanism, these changes quickly elicit
appropriate reactions as business and consumers adjust their
production and consumption decisions, respectively allowing the
market to adjust quickly before serious imbalances arise
Weakness “boom and bust” cycles have persisted since the market
became the dominant institution for organizing economic activities
4) In what sense are governments economic institutions? Evaluate the strengths and
weaknesses of governments in terms of efficiency, growth, and economic stability.**
Strength Efficiency- Government can improve efficiency by responding to
imperfection in the market such as a lack of information can be remedied by
government provsion, concentrations of private power the impede
competition can be addressed with antitrust lawsuits, regulation, or public
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