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by: Mara Franco

1-13TheInvisibleHand.pdf ECN 211

Marketplace > Arizona State University > Economcs > ECN 211 > 1 13TheInvisibleHand pdf
Mara Franco
Macroeconomic Principles
Mr. Goegan

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About this Document

Econ Notes
Macroeconomic Principles
Mr. Goegan
Class Notes
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This 0 page Class Notes was uploaded by Mara Franco on Wednesday February 3, 2016. The Class Notes belongs to ECN 211 at Arizona State University taught by Mr. Goegan in Spring 2016. Since its upload, it has received 15 views. For similar materials see Macroeconomic Principles in Economcs at Arizona State University.


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Date Created: 02/03/16
1132016 The invisible Hand Adam Smith s Big Idea gt The Fundamental Economic Problem 0 O The material wealth of our world is nite and perhaps more importantly so is our time forces us to make a choice about how resources are used Because things are scarce that means we have to make a choice with our time and our stuff Choices imply costs Choices sucks because it means we have to give up other things we could39ve done Ex If we use resources to make a plane it means we can39t use those resources to make a car the alternatives we sacri ce They suck The fundamental economic problem then is how we should allocate those resources gt The Vastness of this Problem 1 Average person consumes 100 gallons of water a day 2 Average person consumes 3339 calories of food 3 We all have ton of stuff gt The Wealth of Nations 1 Smith39s answer to the problem of allocation is pretty much this the best allocation of resources in society will be achieved if everyone does what they think is best 2 Things will make their way to where they are valued the most gt The Key elements 1 people are able to enterexit market or trade whenever they want Consumers are they buyers of goods and services Producers seller of goods and services Everyone needs to be able to comego whenever Freedom to participate or not ownership and contracts recognized and enforced Bene ciaries of something are the OWNERS of that thing Burdens of something fall on the OWNDERs of that thing 3 people choose their best option based in the info they have Buyerssellers are able to translate cot and bene ts into monetary value BuyersWillingness to pay SellersWillingness to accept Smith argued that competition among buyers and sellers would push resources to the person or place they are valued the most 0000 O O gt Economic Ef ciency the skittles nd their way to the people who want them the most where wanting them is de ned by how much they are willing to pay If the person who won the auction wasn39t the person who valued the skittles the most then the winner could bene t by selling the skittles to that person An outcome is considered economically ef cient when the goods and services end up in the hands of the person who values them the most In this outcome no person can be made better off without making someone worse off Further the costs of redistribution exceed the bene ts Normativehow things OUGHT to be Dormativehow things ARE gt The Sel ess Principle Many interpret Smith to be saying that quotgreed is goodquot This interpretation is not wrong Smith assumed that people are out to maximize their own wellbeing and not the wellbeing of anyone else Indeed some of the beauty of Smith39s idea is that greed get39s thwarted and the product of it39s labor is that society ends up as best off as it can be What gets overlooked is the deeply rooted assumption that everyone matters The economic theories derived from Smith treat everyone39s wellbeing equally If one person bene ts by 10 society bene ts by 10 Adam smith says whatever makes you happy is what is good because it whats best to society Everybody is equal You re part of society and you matter like everyone else You do what you think is right gt Willingness to pay 0 Different buyers place different values on goods and services This value depends on many factors Income of the consumer if I make more buy more Willing to pay a lot more for a lot of things If income comes down then you purchase less Prices of related goodsif price of coke goes up might choose alternative because its cheaper Consumer preferenceslike sprite more than coke Expectations held by the consumerexpect hurricane so buy batteries 0 Different buyers place different values on goods and services iquot 15 14 13 12 11 lg This value depends on many factors Income of the consumer Prices of related goods Consumer preferences ectations held by the consumer AS the prlce falls The quantity 1 demanded 1hcreases 1 2 345 7 8 9 10 11 12 3913 14 15 Quantity gt Willingness to Accept 0 Different sellers face different costs in producing goods and services This costs depend on many factors The cost of raw materials and labor Technology available Expectations held by producers Natural events Value of products not made 0 Together sellers form the supply side of the market Supply is the relationship between the price of a good and the quantity that would be produced by all sellers in the market at that price Price 14 Dl od ucedl v 39 13 moreases lg M 11 As if E price I rises v I LDCJ 1 2 31456 7 9 1O 11 12 13 1439 15 Quantity gt Equilibrium is always downhill o Equilibrium is found where supply and demand cross At this point and at this point only 0 Everyone who wants the good at that price gets it o No supplier has an incentive to change their price or quantity 0 If the price were higher sellers would struggle to nd buyers and would cut prices to compete or exit the market If the price were lower lucky buyers would become resellers accepting higher prices from those willing to pay more SURPLUSPRICES TOO HIGH Price 99 If the price were lower lucky buyers would become resellers accepting higher prices from those willing to pay more SHORTAGE PRICES TOO LOW Equilibrium means EVERYBODY IS HAPPY P e OS5 95 Q QLlantity Demand goes up people39s willingness to pay goes up People buy more Cost of production goes up price goes down Moon is a Harsh Mistress 0 When the monetary price of a good is prevented from reaching equilibrium market forces nd other ways to charge you or lower the price 0 Black Friday comes with both discounts and lines 0 Facebook uses your personal information to sell advertisements 0 Movies music and television are widely pirated on the internet 0 Textbooks have a robust usedmarket quotThere ain39t no such thing as free lunchquot gt When it goes wrong 0 Transaction Costs costs incurred in making an economic exchange or the cost of participating in a market 0 Search and Information Costs Finding out if something exists and who has the lowest price 0 Travel websites eBay Uber and other services exist because they reduce search costs 0 Businesses spend billions on advertising campaigns to alert consumers to their product 0 Bargaining Costs The cost of drawing up contracts etc o Receipts lawyers and social awkwardness are bargaining costs 0 Policing and Enforcement Costs The cost of making sure everyone sticks to the deal 0 The legal system police and bureaucracy are enforcement costs 0 Imperfect Information When one or both parties to a transaction do not have all of the information required to make an informed trade 0 Not know the quality of a product may lead to uncertainty about what it is worth to you


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