The Market System in Action. Session 3 Professor Dermot McAleese. OUTLINE. The market system The role of prices Demand and supply Taxes, subsidies and quantitative restrictions The efficiency of the free market Free market in the social context. COMPETITIVE MARKET.
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Professor Dermot McAleese
The market system
The role of prices
Demand and supply
Taxes, subsidies and quantitative restrictions
The efficiency of the free market
Free market in the social context
Large number of sellers and buyers (free entry and exit)
Consumers maximise utility
Firms maximise profit
Invest in capital goods
TOTAL ECONOMIC ACTIVITY
Non-marketed economic activity
Non-marketed economic activity
Marketed economic activity
Marketed economic activity
TOTAL MARKET ECONOMY
Measurement monetary aggregates method
income expenditure discrepancy
high taxes and perceived lack of ‘fairness’
high burden of regulations
high unemployment combined with high unemployment compensation
onerous employment regulations
cultural and personal behavioural characteristics
Cureslower tax rates and ‘broaden’ tax base
improve regulation and legal restrictions
enhance monitoring and international co-operation
Source: F. Schneider, ‘The shadow economies of Western Europe’,
Economic Affairs, September 1997.
Illicit syphoning of funds from projects and companies has amounted to 13-16% of China’s GDP over the past decade
Source: Asian Wall Street Journal, March 2001, citing research of Professor Hu Angang, Qinghua University
Price is determined by DEMAND and SUPPLY
Price as incentive
Price as source of information
Market equilibrium (D=S)
“…..It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but their self-love…”Adam Smith Wealth of Nations, Book 1, Chapter II, p. 18
Water is becoming an increasingly scarce resource. About 70% of water supplies in countries such as China and Morocco is consumed by farmers for irrigation at below-cost prices.
E7The minimum price set by the European Commission for many foodstuffs and dairy products is set above the world equilibrium price. The objective of this price ‘floor’ is to support farm incomes. Use a supply and demand diagram to illustrate the effects of setting the minimum price on a) food prices in the EUb) farm incomes
c) government spending and d) other countries.
E1. Draw a graph showing the demand curve and the supply curve of personal computers. How would the graph be affected by:
a rise in the price of software
a rise in the price of electric typewriters
a fall in the price of desktop printers
an expected increase in next year's PC prices
a 10 per cent sales tax on computers
a fall in income tax
mu > mc
mu = mc
mu < mc
Seeking only to satisfy their individual wants and needs, consumersare led to do so in a way that puts least strain on society’ s resources for the level of satisfaction achieved
Businesses, pursuing private profits, are led to produce goods and services which consumers want, at lowest cost
Owners of capital and land, seeking only to increase their wealth, are led to deploy their assets in the most socially productive ways
Employees, attempting to maximise their welfare, are led to select the training and careers which are most valuable to society
Assumptions: prefect competition, full information and completeness
Stable and reliable medium of exchange
Transparent prices, competition and full information
Private property and legal framework
Minimum standards of truth, trust, acceptance and obligation
Equitable distribution of income
Demand for cigarettes is insensitive (inelastic) with respect to price, but demand for a particular type or brand of cigarette could be very elastic. Use demand and supply curves to analyse the following:
To encourage better quality cigarettes the government will raise the tax rate on low quality brands while lowering the tax rate on more expensive cigarettes. This is aimed at strengthening the position of bigger producers such as Hongta Group, while pushing many smaller local manufacturers out of business. EIU China Country Report August 2001
Discuss what you would consider to be the main determinants of demand and supply of rented apartments. Suppose the government decides that rents are too high and sets a maximum rent. What would you expect the consequences of this action to be for (a) apartment owners, (b) existing renters and (c) future renters?
The government gains revenue by imposing a sales tax. Who stands to lose the most, the consumer or the producer or both?
E6. (a) Consider the economic consequences of a prohibition on the consumption of alcohol. What happens to the supply curve? What happens to the demand curve? How will the prohibition affect equilibrium consumption and price? What further indirect effects are likely to follow? (According to some writers, prohibition is likely to raise the level of violence by increasing the marginal benefits and lowering the marginal costs of breaking the law.)
(b) Suppose the head of an anti-drugs enforcement agency reports, as evidence of the agency's success in deterring drug users, that the street price of drugs has fallen. Is this evidence conclusive? What other factors might have caused the fall in price?
Use demand and supply analysis to illustrate the effects of China’s removal on restrictions on imports of automobiles. Import tariffs on automobiles will fall to 25% by mid 2006 from present level of 70-90%.
What will be the effect on: