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Chapter 4

Chapter 4 Full Notes

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Department
Economics
Course
ECON 1131
Professor
All Professors
Semester
Fall

Description
Chapter 4: Markets, Prices, and the U.S. Economy  Two main themes in economic analysis are the economic problem and the exchange of goods and services and factors of production Markets  Market exchanges occur in a variety of institutional settings, and markets have distinctive product and geographic dimensions that vary considerably from market to market Market Boundaries  The boundaries between individual products and factors of production are not often clear-cut from either the buyer’s or the supplier’s perspectives  Economists first attempt to distinguish individual products from the buyers’ perspective o Do buyers view the product as reasonably distinct? Are close substitutes available?  Industry: the collection of all firms producing the same product  Market researchers use a geographic definition of a market because they are primarily interested in the sales potential of a particular geographic area  Economists define a market in terms of an individual product or factor of production because they are primarily interested in the exchanges of particular products and factors between buyers and sellers Characteristics of Modern Market Economies  Analyzing the behavior of prices is a central focus of economies because markets function by means of prices  Main interest in price: how they process economic information and coordinate economic decisions o Fundamental economic question about market exchange: How do prices coordinate market exchanges and thereby allocate society’s scarce resources?  Individuals and business firms enter into market exchanges with completely different economic problems- different obj., different constraints, different alternatives  Only thing shared is price  Markets and prices are tied so closely together that a market economy is sometimes referred to interchangeable as a price system  3 characteristics of modern market economy that places a special burden on prices: o Production is highly specialized o Market exchanges do not occur in isolation o Sheer size and diversity of a developed market economy Specialization  As economies develop, people become generalists in consumption and specialists in production  Division of labor: once an economy begins to gro
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