Class 5 - Market Economies

Outline:
1. Private ownership of resources
2. Consumer and producer sovereignty
3. Role of prices
4. Profit Incentives

Breeze through analytics of supply & demand in ch 4.
Ch 5 is interesting - Elasticity - responsiveness to price changes in the short, med and long run.
Govt intervention (subsidies, rent control, etc)
International trade
Best of ch 10 and 11 - externalities - common resources (see today's Nobel prize winner) - govt ability to handle those common resources

No class on 10/26.

History:
1989 eastern europe - nov 9 berlin wall fell.
1991 in soviet union
rest of 90s they tried to build a market economy.

Economists expected the free markets to easily achieve equilibrium. Similar to financial markets. Markets are more fragile and complicated than people, even economists, think. The softer sciences are very important in the full analysis.

1. Private ownership of resources
Privately-owned resources lead to market economies, even if the government of the country is socialist, such as Sweden. (Volvo, Ikea, H&M, SAS). It's complicated - it requires a recorder of deeds, lawyers, contracts, courts.
US gov't buying shares of GM was not a step away from market economies, it was meant to keep it from falling apart. If the US was heading towards socialism, the govt would be buying good companies, not bad ones.

2. Consumer and producer sovereignty
People have the right to decide and think for themselves what to buy and what to sell. This is one big difference btwn east and west germans in their general attitude. Insurance salesmen were phenomenally successful in east germany because of their attitude. In the former soviet union, entrepeneurs came from hard/pure sciences and literature, because those were the people who recognized the weaknesses of communism and chose those things to study because they are independent. They were the free thinkers.

3. Role of prices
Single most important piece of info in a market economy is the prices. Market prices tell you about demand, availability, scarcity, etc. They provide signals in information to buyers and sellers.

4. Profit incentives
People who understand the information contained in prices, stand to benefit from profits. It has a positive social value.

Market economies take a long time (decades) to develop. They require a lot of infrastructure. You can't just open up free markets and assume they will work.

Market Participants

1. Demand (bring money, leave with something else)
- Buyers
- Purchasers
- Consumers

2. Supply (includes laborers)
- Sellers
- Producers

Supply means how many are available for sale (ex Renoir paintings)

Equilibrium

No moral or ethical connotations. Prior to Adam Smith, there was discussion of what constitutes a "fair" price. See Thomas Aquinas. See page 77, figure 8.

Rising prices are not good or bad. It all depends on whether you're buying or selling.

See figure 10 on page 80. Mankiw provides the sequence of events. Chronology is very important. So is terminology. See tables 1 and 2 on page 71 and 76.

Single most important thing in our textbook (pg 79):
Three steps to analyzing changes in equilibrium
1. Decide whether the event shifts the supply or demand curve (or possibly both)
2. Decide in which direction the curve shifts
3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.

See figure 10-11: How shifts in supply/demand affect the equilibrium
See figure 12 - A shift in both supply and demand

See table 4: All 9 possible combinations of supply/demand changes (or non-changes)
Some combinations (where both supply and demand are changing) are ambiguous, but the ambiguity can always be solved if you know the relative size of the increase/decrease in the supply or demand.