ECON 3650 Lecture Notes - Lecture 2: Consumer Choice, Perfect Competition, Common Era

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ECON 3650: Policy Analysis
Hennadige N. Thenuwara
Lecture 2 Government Involvement in Public Policies
Formation of Governments
About 200,000 years ago our ancestors, Homo sapiens, appeared in Ethiopia, and began to
emigrate out of Africa to Europe and Asia. 1 About 50,000 years ago they had reached
Australia by boat, 33,000 years ago the western Pacific islands, 15,000 years ago the
Americas, 4,500 years ago the Arctic 2,000 years ago deep pacific islands, and finally 1,200
years ago they reached New Zealand.
Homo sapiens were hunter-gatherers during the Paleolithic period, the period of primitive
stone tools from about 2.5 million years ago to 10,000 BCE. To facilitate their way of living
they had invented various tools, but experienced a very slow progress in inventions.2 The
bow and the arrow were invented by about 62,000 BCE as evidenced from artifacts found in
a cave in South Africa. They had invented the spear-thrower, after about 41,000 years, by
21,000 BCE which added length and leverage to a throwing arm.
Major advances in human development occurred with the discovery of metal and invention
of alloys. People made jewelry from naturally occurring nuggets of gold and copper in
Western Asia and Egypt in 7000 BCE. Later in 6500 BCE they knew how to extract copper
from mineral ores by smelting. By 3200 BCE people in western Asia discovered bronze by
mixing a small amount of tin with copper, which is a much harder material. Bronze was
used for sculptures, vessels and weapons. The Iron Age began in 1550 BCE with iron
smelting in the area of today’s Turkey.
People living in around 6000 BCE regarded what they could not fathom as awesome, and
worshiped them. They worshiped the sky, the sun and the moon. They created many gods
in their minds, and believed that many natural phenomena such as the rain, drought, snow
and natural disasters such as earthquakes are acts of gods. Thus, they built magnificent
temples to worship gods. Sumerians built the first temple was in 5300 BCE dedicated to the
god of fresh water. Egyptians built the Temple of Ra in 2600 BCE for the Sun God.
Kings emerged out of the fear of people of great disasters. First, people built temples for
the gods who they believed were impacting their lives. People respected the temple chiefs as
1 The Times Atlas of World History
2 BCE - Before Common Era, or Before Christ
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they believed that gods communicated with the chiefs. The temple chief gradually assumed
the role of the king. Later on, the roles of the king and the temple chief were divided.
As the civilizations formed, kings became the heads of those civilizations. People thought
the kings are divine, and have the ability control phenomenon such as river floods. Kings
had to ensure greater wealth for the people, and as such were constantly engaged in warfare
to expand the territory, and to unite fragmented regions, as witnessed in Egypt and China.
The civilizations continued to grow in complexity. Democracy was born in Greece in
507BC. In subsequent years various countries adopted various forms of government.
Magna Carta
The Great Charter of the Liberties was signed between the King John of England and
Barons on June 15, 1215 at Runnymede, Windsor, England. This resulted in the setting up
of a parliament in England, and the birth of democracy in England. This made even the king
of England obedient to the law.
Free Market Capitalism
The prominent market system in the western world is free market capitalism, an idea born in
France in the nineteenth century. It was termed ‘Laissez-Faire’ or ‘hands-off’ where the
government had its hands off the market. All economic decisions pertaining to production
and consumption were decided in the market free from the government intervention. The
economics of the free market was articulated by Adam Smith (1723-1790) in his influential
book, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’. Birth of economics
The Well Functioning Market Economy versus the Government Why did we think
the government had a role to play?
The Market Economy = perfect competition
Market assumptions about the structure of individual product and factor markets
Technical assumptions about the nature of individual product and factor markets
Market Assumptions
Regarding the market assumptions, markets work best if they are perfectly competitive.
Every perfectly competitive product and factor market would have:
(1) Large numbers of buyers and sellers, so that the actions of any one consumer or
producer have no noticeable effect on the market;
(2) Homogeneous products or factors wheat is wheat everywhere (unskilled labor is
unskilled labor everywhere); everyone can make the same good
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