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ECON 208 - Notes, week of Oct 6

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Economics (Arts)
ECON 208
Lee Ohanian

Adrienne Pacini ECON 208 WEEK October 6 2009 MARKETS IN ACTION Chapter 5The Interaction Among MarketsNo market or industry exists in isolation from the economys many other markets o Feedback changes in one market that cause changes in anotherPartialequilibrium analysis examines a single market in isolation and ignores feedback effects from other markets o In general this is appropriate when the specific market is quite small relative to the entire economyo Most of microeconomics uses partialequilibriumGeneralequilibrium analysis more complicated because it involves the analysis of all of the economys markets simultaneously o Recognizing the interactions among the various markets o Recognizing how events in each market affect other markets Market linkages and interactions linkages exist with mobile demand and supply o Joint production linkages when things are produced together when one product is the byproduct of another o Inputoutput linkages when one product is necessary to produce the other o Linkages through resource constraints cause links even between largely unrelated productsPoliticians give subsidy to an industry in order to increase jobs in a specific region but where do these jobs come fromIf on the production possibilities boundary that must mean that there will be fewer jobs elsewhere This causes a shift in the resources to the product being subsidised GovernmentControlled PricesSometimes governments fix the price at which a product must be bought and sold in the domestic market o This creates shortages or surpluses in the market Disequilibrium PricesWhen price controls are in place what determines the quantity actually traded on the marketAt any disequilibrium price quantity exchanged is determined by the lesser of quantity demanded or quantity supplied Price FloorsA minimum possible price at which a product or service can be sold o Sometimes it is illegal to sell the product below the prescribed priceExample minimum wage cannot go below a certain amount o Shock effect of minimum wage when firms are hit with a minimum wage they must become more efficient so that they will not have to hire as many workers o This results in a higher demand for jobsA binding price floor must be above the freemarket equilibrium price o Therefore there will be excess supplyExcess supply can result in unemployment when considering minimum wage price floors
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