Circular Flow Chart
Explain:
200
What do individuals supply and demand? What is given?
They supply factors and demand products. Their preferences and initial endowment (skill set, techniques, land, capital) are given.
200
Explain “Equal Access to Markets”
Everybody can access all markets, and everyone has an equal opportunity to pursue all options in the market regardless of race, religion, gender, or anything else. In many places in the world and in the US, it used to be a strong assumption, but now and hopefully in the future the assumptions are moving into weaker ones. There are no government intervention restricting firms entering and exiting the market. If a certain demographic was excluded from a market, there would not be equal access to markets.
200
What does the product market supply and demand?
The product market supplies and demands goods and services.
200
Explain why it is important that markets need to form quickly and function smoothly when needed to coordinate choices.
Markets need to function smoothly and coordinate choices because many decisions they make have ramifications into other markets if they are not careful. If a chemical company produces excess waste that is bad for people who live down the road, they need to be able to form and change their inputs, and potentially their market, quickly and coordinate their choices with the neighborhoods needs that are different from their own.
200
What do firms supply and demand? What is given?
Firms supply products and demand factors, given their technology. (ie Haiti's shoveling technique vs Germany's 3d printers).
200
Explain "Equal Access to Information"
It means that everyone has an equal opportunity to get information, not that everyone has all information or that everyone has the same information. Within a specific market, everybody can have equal access to information regarding it (ie banana producers can all check the price of bananas on their smartphones, but they have to buy the phone). It often requires resources to acquire information, which often brings up opportunity cost: is it worth it to spend resources on information or to save them for something else?
A violation would be if you had inside information that a corporate move was going to affect the price of the corporations stock, and then used your knowledge to beat the market, creating significant power and advantage for yourself in the market.
200
What does the factor market supply and demand?
The factor market supplies and demands factors of production: Land, Labor, and Capital.
200
Explain Pareto Optimality.
It is when society is running at its most optimal way, and there is no way to reallocate resources to better society. There is no way to better somebody else without making somebody else worse. There is no slack in the rope.
500
Draw the Factor Market
500
What are our two nice assumptions? Explain them.
No Market Power: No one can control the market process to create an advantage. Everyone faces the same set of opportunities and obstacles in the race for wealth. It assumes that commutative justice rules are implemented so everyone has access to equal information and equal access to markets.
No Market Failure: Markets will do the job they are supposed to do. Markets will form quickly when needed to coordinate choices, and will function smoothly and quickly to coordinate choices.