chapter 2 samuelson 18e

7/18/2019 Chapter 2 Samuelson 18e

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1Syed Arshad Hussain -Lecturer

Markets and Governments in a

Modern Economy

Chapter 2

Samuelson, Nordhaus 18e


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Markets & Government in a

Modern Economy

hat is a Market!

"# market is a mechanism throu$h %hich uyers and

sellers interact to determine prices and e'chan$e

$oods and services(

" Market System and )rice

)rices serve as si$nals to producers and consumers(

" )rices coordinate the decisions o* producers and

consumers in a market


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+Syed Arshad Hussain -Lecturer


Modern Economy

hat is a Market! Cont.

" o% Markets Solve the )rolem o* the -hree

Economic )rolems!

.y matchin$ sellers and uyers /supply and

demand0 in each market, a market economy

simultaneously solves the three prolems o* what,

how and for whom.


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Syed Arshad Hussain -Lecturer

The Circular Flow of

Economic ActivityHere goods and services fow

clockwise: Labor services

supplied by households fow

to rms, and goods and

services produced by rms

fow to households

!ayment "usually money#

fows in the opposite

"counterclockwise# direction:

!ayment $or goods and

services fows $rom

households to rms, andpayment $or labor services

fows $rom rms to

households


Modern Economy


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Syed Arshad Hussain -Lecturer


Modern Economy hat is a Market! Cont.

" 3aor Market4 -he input5*actor market in %hichhouseholds supply %ork *or %a$es to *irms that demandlaor(

" Capital Market4 -he input5*actor market in %hichhouseholds supply their savin$s, *or interest or *or claimsto *uture pro*its, to *irms that demand *unds to uy capital$oods(

" 3and Market4 -he input5*actor market in %hichhouseholds supply land or other real property ine'chan$e *or rent(


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-he Market System 7elies on Supply &

emand to Solve the -rio o* Economic

)rolems

Chapter 2

Figure 2-1


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-rade, Money and Capital

" -rade, Speciali:ation, and ivision o* 3aor

" Money4 -he 3uricant o* E'chan$e

" Capital


Modern Economy


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-rade, Money and Capital (cont.)

" -rade, Speciali:ation, and ivision o* 3aor

#s individuals and countries ecome increasin$ly

speciali:ed, they tend to concentrate on particular

commodities and trade their surplus output *or

$oods produced y others(


Modern Economy


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;Syed Arshad Hussain -Lecturer

-rade, Money and Capital (cont.)

" Money4 -he 3uricant o* E'chan$e

Money is the universally acceptale medium o*

e'chan$e(


Modern Economy


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1


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-he Economic 7ole o* Government

" Governments have threemain economic

*unctions in a market economy(

E**iciency

" =mper*ect Competition

" E'ternalities

" )ulic Goods

E>uity

Macroeconomic Gro%th


Modern Economy


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" E**iciency

Governments increase efficiencyy promotin$

competition, curin$ externalities like pollution,

and providin$ public goods(


Modern Economy


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1+Syed Arshad Hussain -Lecturer


" E**iciency (cont.)

)er*ect Competition

"# market in %hich no *irm or consumer is lar$e enou$h to

a**ect the market price(

=mper*ect Competition" hen a uyer or seller can a**ect a $ood?s price(


Modern Economy


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Externalities

" E'ternalities /or spillover e**ects0 occur %hen *irms or

people impose cost or ene*its on others outside the

marketplace(


Modern Economy


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Public Goods

" Commodities or services %hich can e en@oyed y

everyone and *rom %hich no one can e e'cluded(


Modern Economy


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" E>uity (fairness)

Governments promote equity y usin$ tax and

expenditure programs to redistribute income

to%ard particular $roups(


Modern Economy


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" Macroeconomic Staility and Gro%th

Governments use the tools o* *iscal and monetary

policies to encoura$e economic $ro%th(


Modern Economy

Ch 2


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18Syed Arshad Hussain -

Chapter 2

Table 2-1Markets & Government in a

Modern Economy

chapter 2 samuelson 18e

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