MARKETS AND GOVERNMENT IN A MODERN

ECONOMY Chapter 2

WHAT IS A MARKET?Defination:A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services.

FEATURES OF A MARKET Not one individual or organization or

government, but billions of consumers and businesses involved in voluntary trade.

No chaos but economic order. It is an Elaborate mechanism for

coordinating people. Everything has a price and theses

prices act as signals.

MARKET EQUILIBRIUM

Market Equilibrium of demand and supply represents a balance among all

the different buyers and sellers.

MARKET, A SOLUTION TO THE 3 ECONOMIC PROBLEMS.

What? Determined by income and expenditure. Greatly depends on Profit.

How? Determined by competition among different producers. Need to keep up with technology.

For whom? Depends on the demand and supply in the market for factors of production.

MONARCHS OF A MARKETPLACE

Tastes –These initiate and acquired tastes-Determined by consumer vote-direct the uses of society’s resources

Resources- Are limited and therefore need to be used in the most efficient manner

Technology should be up to date and chosen accordingly.

THE CIRCULAR FLOW

Prices on product market

Prices on factor market ( Wages, rent,

interest)

Consumers

Businesses

Goods And Services

Goods And Services

Labor, land, Capital

Labor, Land

Capital.

WhatHow

For whom

Demand

Supply

Demand

Supply

CIRCULAR FLOW OF ECONOMIC LIFE Top flow- Dollar votes of households

interact with businesses in supplying to the product market. Helping in what to produce.

Business demand for inputs meets the supply of labor and other inputs in the factor markets bellow determining wage rate and interests; income influence for whom to produce.

Business competition to buy factor input and sell goods most cheaply determine How goods are produced

THE INVISIBLE HANDAdam Smith discovered a remarkable property of a competitive market economyUnder perfect competition and with no market failures, markets will squeeze as many useful goods and services out of the available resources. But when monopolies or pollution or similar market failures become pervasive, then the invisible hand is destroyed

TRADE, MONEY AND CAPITAL

Advanced economies have three features Trade Specialization : Trade among individuals

and countries that depends on great specialization- Division of labor

Money: A modern economies today makes extensive use of money . It measures the economic value of things and for financing trade

Capital: It leverages labor power into a much more efficient factor of production and increases production at an earlier age

TRADE,SPECIALIZATION AND DIVISION OF LABOR

Todays economies -Depends heavily on the specialization of individuals and firms -Connected by an extensive network of trade Specialization occurs when people and countries concentrate their

efforts on a particular set of tasks, it permits each person and country to use to best advantage the specific skills and resources that are available.

Capital and Land are also highly specialized. Specialization gives greater productivity Individuals and countries then voluntarily trade goods in which they

specialize for others products, vastly increasing the range and quantity of consumption and having the potential to raise everyone’s living standards

MONEY

Money is the means of payment in the form of currency and checks used to buy things.

When everyone trusts and accepts money as payment for goods and debts, trade is facilitated.

Governments control the money supply through their central banks.

Like other lubricants, money can get overheated and damage the economic engine.

CAPITAL

A produced factor of production a durable input which is itself an output of the economy.

More capital formation=>consumption Cut and more savings=>increase future

productivity and future consumption In a market economy, capital typically is

privately owned, and the income from capital goes to individuals=>capitalism

THE ECONOMIC ROLE OF GOVERNMENT

Governments have three main economic functions in a market economy.

Governments increase efficiency by promoting competition, curbing externalities like pollution, and providing public goods

Governments promote equity by using tax and expenditure programs to redistribute income toward particular groups.

Governments foster macroeconomic stability and growth-reducing unemployment and inflation while encouraging economic growth-through fiscal policy and monetary regulation.

EFFICIENCY

Perfectly competitive markets will produce an efficient allocation of resources, so the economy is on its Production-Possibility Frontier

The three most important ones involved imperfect competition.

Imperfect competition such as monopolies Externalities such as pollution Public goods such as national defense and light

houses

IMPERFECT COMPETITION

It happen when a buyer or a seller affect the price level

Consequences of Imperfect Competition When it happen society moves inside the PPF Too high price and too low output is the hallmark

of the inefficiencies associated with imperfect competition

Steps taken by the Government to curb the IE. Regulate the price and profit of monopolies such

as local water , electricity etc……

PUBLIC GOODS public goods are commodities which can

be enjoyed by everyone and from which no one can be excluded.

The provision of these public goods are generally insufficient..and the government steps into to encourage the production of public goods (mainly through taxes).

TAXES The government has to find revenues to

pay for the public goods it supplies as well as some of the programs it undertakes for public welfare.

The government collects these revenues in the form of taxes, levied on various things. For eg, on personal and corporate income, sales of consumer goods etc.

EQUITY The situation in an economy in which

the apportionment of resources or goods among the people is considered fair.

But however the markets do not always produce a fair distribution of income. even the most efficient market system may generate inequality.

WHY DOES THIS PROBLEM OF UNEQUAL DISTRIBUTION OCCUR.???

The reason is that incomes are determined by a wide variety of factors including effort, education, inheritance, factor prices etc.

One example would be. Every year the Forbes magazine lists the

400 richest Americans and its impressive that many of them either received their wealth by inheritance or used their inherited wealth to gain even greater wealth.

CONT… Also income distribution may be

politically or ethically unacceptable. If a democratic society(government) does not like the distribution of income in the market system .It can take steps to change the distribution of income.

MACROECONOMIC GROWTH AND STABILITY

Business cycle??? The recurring and fluctuating

levels of economic activity that an economy experiences over a long period of time. Basically inflations and recessions..

To deal with these types of economic instabilities the government uses its Fiscal and Monetary policies

FISCAL POLICIES

It refers to a government’s spending and taxation policies intended to maintain economic stability.

Indicated by levels of unemployment, interest rates, prices and economic growth.

Eg: In order to curb price inflation associated with high levels consumer spending. The government may institute higher taxes resulting in lower levels of disposable income. Likewise the government may engage in public spending in order to increase the economy’s cash flow during times of recession.

MONETARY POLICY

Refers to a range of measures by which the government. Through the central banks, try to affect a Nations money supply, it interest rates or both.

Here the central banks respond to current economic conditions and try to protect the value of money against inflation.

Eg :open market operations, changing reserve requirements and setting the discount interest rate.

THE MIXED ECONOMY TODAY

It is one in which the market determines output and prices in most individual sectors while the government steers the overall economy with programs of taxation, spending, and monetary regulation.

Eg ; The United States is considered a mixed economy because although the factors of production are owned by the private sector, the government does get involved in decisions.It determines what infrastructure will be built, it also has passed laws putting many restrictions and regulations upon the private industries.( for me.. minimum wage laws ,anti-pollution laws etc.)

CONT.. Governments harness private ingenuity

through the market mechanisms to help achieve certain social aims.

An efficient and humane society requires both halves of the mixed society-market and government.

THANK YOU

Group 1