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USC ECON 205 - Market laws and government intervention

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ECON 205 1st Edition Lecture 4Outline of Last LectureI. Ceteris paribus – other things remaining constant or the sameII. Markets coordinate the self-interest of millions of people to achieve social goods – the invisible hand – does greed work?III. How about a command system or tampering with the laws of the market (demand and supply)IV. The choice of alternatives – trade offs - production possibilities Outline of Current LectureI. Schedule of demand and supply II. Shift or change in demand and supplyIII. Market equilibriumIV. Elasticity of supply and demandV. Consumer and producer surplusVI. Factors of productionVII. Role of government in a market economy- price controls – floor and ceilingVIII. Equity – fairness and InequalityCurrent LectureI. Schedule of demand and supply The demand curve has many points, relating price and quantity demanded.- Quantity demanded usually decreases with price.The supply curve has many points, relating price and quantity supplied.- Quantity supplied usually increases with price.II. Shift or change in supply and demandA shift or change in supply and demand is a shift of the whole schedule.Demand increases when income changes, taste changes, or habit changes. Supply shifts when the cost of production shifts due to factors like new resource discovery or new innovations.Technology is the main factor for supply increase.III. Market EquilibriumMarket equilibrium is when both the buyer and seller are satisfied—there is no further tendency to change.IV. Elasticity of Supply and DemandElasticity is the sensitivity of supply and demand to change in price. - Perfectly elastic is when supply and/or demand are very dependent on price.- Perfectly inelastic is when there is no change in supply and/or demand due to price changes.- Normal elasticity is when demand and/or supply shift with price.In reality, we cannot charge as much as we want.We need either competition to bring a fair price, or the government should regulate prices for an industry. For example, utilities cannot change price at free will—they have to petition the government to change their prices. V. Consumer and producer surplusThere are always consumer and producer surpluses.Consumer surplus is the financial gain of consumers when they can buy a product for a lower price than the highest price that they would be willing to pay. Producer surplus is the financial gain that producers get by selling at a market price higher than the minimum they would be willing to sell it for.VI. Factors of productionThe factors of production classically are: labor (manpower) and the wages paid for laborers, capital (products created that produce more products like machinery) and interest, land and rent paid to use land, and enterprise (business) and profit.VII. Role of government in a market economy—price controls—floor and ceilingA floor is the minimum price charged for a commodity, while ceilings are the maximum prices for a commodity.The government can regulate the market by prohibiting monopolies (anti-trust laws), promotingcompetition, taxing certain industries, and introducing regulations.When competition cannot be created, those are natural monopolies. The government sets a price for those services.VIII. Equity and inequality Equity means fairness. It depends what one considers fair (i.e. it is not fair to pay people the same for different amounts of work in a capitalist, merit-based system).- It can be defined empirically or by your value system.Nordic countries have determined that every societal member should have a minimum amount of property and income, so taxation is very high.In other societies like America, we have a socio-capitalistic economy—we have income for the poor (minimum wage), try to provide income for everyone (income policy)Inequality is unfair


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