ECON101 Chapter Notes - Chapter 7: Pareto Efficiency, Economic Surplus, Invisible Hand

67 views6 pages

limeminnow829

31 Mar 2016

School

University of Delaware

Department

Economics

Course

ECON101

Professor

Butler Julianna

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Adam smith: father of economics: he claimed that self-interest was a necessary ingredient for an economy to function efficiently, in his treatise, the wealth of nations, he says: The invisible hand efficiently allocates goods and services to buyers and sellers. The invisible hand leads to efficient production within an industry. The invisible hand allocates resources efficiently across industries. There are trade-offs between making the economic pie as big as possible and dividing the pieces equally. Social surplus: the sum of consumer surplus and producer surplus. Consumer surplus: difference between the buyers" reservation values and what the buyers actually pay. Producer surplus: difference between the price and the sellers" reservation values (marginal cost) For social surplus to be maximized, the highest-value buyers are making a purchase and the lowest-cost sellers are selling (buyers and sellers are optimizing) (cid:1) Social surplus is maximized at the competitive market equilibrium.

Related Questions

2.1 Adam Smith is often called the father of economics. His famous book, The Wealth of Nations, talks about an invisible hand which automatically allocates goods to the persons most able to put them to good use. The invisible hand operates through the price mechanism for goods and services, so that individuals who trade on the market, while seeking only their own good, are actually efficiently allocating society's resources.

His ideas, if applied to modern capital markets, imply that these markets would efficiently allocate investment capital to the firms that would use the capital most efficiently in producing goods and services for society. But this would happen only if markets were left to operate without state intervention.

Do you think modern governments should leave capital markets unregulated? Why or why not?

2.2 Consider a business firm, organized as a proprietorship, which has $100,000 invested in assets a bank loan of $80,000 and $20,000 personal capital invested by the proprietor. If the firm becomes insolvent, who is at risk? Why?

2.3 In the following situation, moral hazard or adverse selection may be present. Indicate which you think is present, if any, and explain your choice.

a. An investor is asking for a bank loan to support a new business she wants to operate. She is unwilling to submit to a credit check.

amethystoyster422

In his famous book "The Wealth of Nations" Adam Smith stated: ï¿½It is not from the benevolence of the butcher, the brewer, or the baker that we expect out dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.ï¿½ What do you think Adam Smith meant in this statement? You must use and connect all the following concepts covered in the Chapter correctly in your response: specialization, self-interest, competition, mutual gains from trade, market coordination, and the price mechanism.

Considered by many to be the founder of modern economics, Adam Smith published his masterpiece The Wealth of Nations in 1776. Smith wrote in support of market economies as feudalism in Europe was unravelling. Hence, many of his insights clashed with the ideas of his contemporaries whom continued to be drawn to less modern notions of markets as governed by duties owed, hierarchy, master and servant, and paternalism. In Smithâs view, markets are guided by the self-interests of market participants, not by obligations imposed, moral or otherwise, by religious authorities, aristocracy, and crown.

Consider the following quote taken from The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizensâ¦.Every individualâ¦neither intends to promote the public interest, nor knows how much he is promoting itâ¦.He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part in it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Now suppose that Jim enters the market to purchase a gallon of milk from a local dairy. Jill enters the market to contribute $100 to a charitable cause. Based on Smithâs analysis, which transaction is guided solely by self-interest? How could either transaction contribute to the public interest? Is one superior to the other in that the first transaction confers mutual economic gains to both parties while the other confers a gain to only a single party? Are two gains superior to one? Briefly discuss.

Rules: Limit your thoughts to no more than two pages total, using Microsoft Word, 12 point type in Times New Roman font. Double spaced with one inch margins throughout. Do not worry about being right or wrong, the purpose of this exercise is for you to stretch your mind and to think critically

ECON101 Chapter Notes - Chapter 7: Pareto Efficiency, Economic Surplus, Invisible Hand

Document Summary

Get access

Related Documents

ECON101 Study Guide - Midterm Guide: Competitive Equilibrium, Paternalism, Price Ceiling

ECON-2006EG Study Guide - Quiz Guide: Marginal Cost, Perfect Competition, Planned Economy

ECON 402 Lecture Notes - Lecture 12: Invisible Hand, Perfect Competition, Pareto Efficiency

Related Questions