Econ 12, Foldvary. Jan. 14, 2002.

Chapter 1, Principles: Markets

Firms and industries exist in markets, so it is important to have a clear understanding of what a market is.

Mankiw has as his princple #6, that Markets are efficient (p. 9).

What does "market" mean?

A pure market consists of voluntary production, exchange, and consumption.

What does it mean for an act to be "voluntary"?

It means that there is no restriction other than to prohibit coercive harm to others.

Harm consists of an invasion, rather than a mere offense.

In a truly free society, there are no legal restrictions other than to prohibit coercive harm to others, and no cost imposed on peaceful and honest action.

In a pure market or truly free market, all action is voluntary.

Consumers are free to buy what pleases them, and producers need to make what the consumers want if they want to stay in business.

In a pure market, NOT "anything goes".

What about taxes? No arbitrary costs, hence no income, sales taxes.

Public revenue from: user fees, rents for resources owned by the people. (Parking meters.)

A pure market economy includes clear and enforced property rights to all resources.

Competition reduces costs to the efficient minimum.

That is why a pure market economy is as efficient as we can possibly get.

Adam Smith's term the "invisible hand" in the Wealth of Nations (p. 10).

Government plays three different roles in an economy.

First, government operates enterprises, like the post office.

Second, government enforces laws prohibiting and punishing coercive harm to others,

such as theft, murder, trespass, kidnaping, and fraud.

Third, governments have interventions: taxes, subsidies, and restrictions that interfere with voluntary action, reducing economic efficiency.

Examples? Price controls, farm restrictions, trade restrictions, substance prohibitions, taxation.

See page 10.

Are there any examples of market failure or inefficiency?

Actual economies are mixed economies, or interventionist.

Chapter 4, Market forces of supply and demand

p. 66, competitive markets.

Defines a market as a group of buyers and sellers.

There are specific markets for particular goods.

Competition: two meanings.

1. (Austrian school): rivalry. One gains at the expense of others.

2. (Neoclassical meaning): the absence of power over the market, i.e. to set a price.

Four types of market structure

1) Atomistic or perfect competition: many buyers and sellers of the identical good.

Zero market power. All are price takers. Stock and commodity market examples.

2) Monopoly: one seller. Total market power. But still can't force consumers to buy.

3) Oligopoly: few sellers, such that the price of any one affects the others.

4) Monopolistic competition: many buyers and sellers, but of differentiated products with close substitutes. Such as banks.