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178.307 Markets, Firms and Consumers

178.307 Markets, Firms and Consumers. Lecture 1- Introduction to the Market Economy. Administration Workshops Test (Wenesday 5 April) Assignment (next week) Expectations Participation. One can succeed at almost anything for which he has enthusiasm Charles Schwab. Lecture Overview.

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178.307 Markets, Firms and Consumers

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  1. 178.307 Markets, Firms and Consumers Lecture 1- Introduction to the Market Economy

  2. Administration Workshops Test (Wenesday 5 April) Assignment (next week) Expectations Participation One can succeed at almost anything for which he has enthusiasm Charles Schwab Lecture Overview

  3. Course Overview Internal Processes The Market Economy Exogenous Organisations The Firm Input Markets

  4. Key Points

  5. Why Mathematics? • Economics is a discipline that depends on logical reasoning. • Experimentation provides ‘less decisive’ results.

  6. “Two women and a goose make a market” Markets are widely used to organise production, allocate consumption goods. Markets are not the only form of organsiation. Other organisations Internal allocations within a firm Production and consumption decisions within a family Soviet-style planned economy The Market Economy

  7. Markets and Efficiency • Mid-20th C debates did not always see markets as more efficient • E.g. Nationalisations in the post-war period • Viability of Socialist Planning • Empirical evidence is that markets are ‘efficient’:

  8. Medicare Processing Performance and Ownership

  9. Efficiency of Markets • Private Property • Ius possendi • Ius utendi • Ius abutendi → right of disposition • Rights have to be enforceable and enforced • Poland • Market Socialism

  10. Hayekean Argument Markets are not ‘designed’ (just like language) They persist in hostile circumstances Black Markets in USSR They overcome ‘preference’ for family/tribe. This increases scope for “exchange” Markets as a Spontaneous Order

  11. Hayekean Argument Knowledge is dispersed in an economy E.g. franchising and professional partnerships Knowledge is not the same as information Knowledge may not be ‘codifiable’. Markets draw upon such knowledge Smith’s analogy of the ‘Invisible Hand’. Soviet-style economies could not use this knowledge. Markets and Dispersed Knowledge

  12. Non-codified Knowledge

  13. Rivalrous market competition is the process that generates knowledge about production processes Freely adjusting market prices are important They correct errors in perception Prices capture more than ‘just’ relative scarcities Markets as a Discovery Process

  14. References Hayek and Socialism http://links.jstor.org/sici?sici=0022-0515%28199712%2935%3A4%3C1856%3AHAS%3E2.0.CO%3B2-Q What does it take for a Market to function- Davidson and Weersink http://links.jstor.org/sici?sici=1058-7195%28199823%2F24%2920%3A2%3C558%3AWDITFA%3E2.0.CO%3B2-F

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