This document provides an overview of key economic concepts related to markets and the role of government in a market economy. It defines markets and how supply and demand determine prices. It discusses how resources are allocated in a market through consumer demand and business competition. The role of government is to promote efficiency, equity, and macroeconomic stability. Government addresses market failures from imperfect competition, externalities, and public goods provision.

1. Chapter 2

2. Defination:A market is a mechanism through
which buyers and sellers interact to determine
prices and exchange goods and services.

3.  Not one individual or organization or
government, but billions of consumers and
businesses involved in voluntary trade.
 No chaos but economic order.
 It is an Elaborate mechanism for coordinating
people.
 Everything has a price and theses prices act
as signals.

4. Market Equilibrium of demand and supply
represents a balance among all the
different buyers and sellers.

5.  What? Determined by income and
expenditure. Greatly depends on Profit.
 How? Determined by competition among
different producers. Need to keep up with
technology.
 For whom? Depends on the demand and
supply in the market for factors of
production.

6.  Tastes –These initiate and acquired tastes-
Determined by consumer vote-direct the
uses of society’s resources
 Resources- Are limited and therefore need
to be used in the most efficient manner
 Technology should be up to date and
chosen accordingly.

7. Prices on
product
market
Prices on
factor
market (
Wages, rent,
interest)
Consumers Businesses
Goods And
Services
Goods And
Services
Labor, land,
Capital
Labor, Land
Capital.
What
How
For whom
Demand
Supply
DemandSupply

8.  Top flow- Dollar votes of households interact
with businesses in supplying to the product
market. Helping in what to produce.
 Business demand for inputs meets the supply
of labor and other inputs in the factor
markets bellow determining wage rate and
interests; income influence for whom to
produce.
 Business competition to buy factor input and
sell goods most cheaply determine How
goods are produced

9. Adam Smith discovered a remarkable property
of a competitive market economy
Under perfect competition and with no market
failures, markets will squeeze as many useful
goods and services out of the available
resources. But when monopolies or pollution or
similar market failures become pervasive, then
the invisible hand is destroyed

10.  Advanced economies have three features
 Trade Specialization : Trade among individuals and countries that depends
on great specialization- Division of labor
 Money: A modern economies today makes extensive use of money . It
measures the economic value of things and for financing trade
 Capital: It leverages labor power into a much more efficient factor of
production and increases production at an earlier age

11.  Todays economies
-Depends heavily on the specialization of individuals and firms
-Connected by an extensive network of trade
 Specialization occurs when people and countries concentrate their efforts on a
particular set of tasks, it permits each person and country to use to best advantage the
specific skills and resources that are available.
 Capital and Land are also highly specialized.
 Specialization gives greater productivity
 Individuals and countries then voluntarily trade goods in which they specialize for
others products, vastly increasing the range and quantity of consumption and having
the potential to raise everyone’s living standards

12.  Money is the means of payment in the form of currency and checks used
to buy things.
 When everyone trusts and accepts money as payment for goods and
debts, trade is facilitated.
 Governments control the money supply through their central banks.
 Like other lubricants, money can get overheated and damage the
economic engine.

13.  A produced factor of production a durable input which is itself an output
of the economy.
 More capital formation=>consumption
 Cut and more savings=>increase future productivity and future
consumption
 In a market economy, capital typically is privately owned, and the income
from capital goes to individuals=>capitalism

14.  Governments have three main economic functions in a market economy.
 Governments increase efficiency by promoting competition, curbing
externalities like pollution, and providing public goods
 Governments promote equity by using tax and expenditure programs to
redistribute income toward particular groups.
 Governments foster macroeconomic stability and growth-reducing
unemployment and inflation while encouraging economic growth-through
fiscal policy and monetary regulation.

15.  Perfectly competitive markets will produce an efficient allocation of
resources, so the economy is on its Production-Possibility Frontier
 The three most important ones involved imperfect competition.
 Imperfect competition such as monopolies
 Externalities such as pollution
 Public goods such as national defense and light houses

16.  It happen when a buyer or a seller affect the price level
 Consequences of Imperfect Competition
 When it happen society moves inside the PPF
 Too high price and too low output is the hallmark of the inefficiencies
associated with imperfect competition
 Steps taken by the Government to curb the IE.
 Regulate the price and profit of monopolies such as local water ,
electricity etc……

17.  public goods are commodities which can be
enjoyed by everyone and from which no one
can be excluded.
 The provision of these public goods are
generally insufficient..and the government
steps into to encourage the production of
public goods (mainly through taxes).

18.  The government has to find revenues to pay
for the public goods it supplies as well as
some of the programs it undertakes for
public welfare.
 The government collects these revenues in
the form of taxes, levied on various things.
For eg, on personal and corporate income,
sales of consumer goods etc.

19.  The situation in an economy in which the
apportionment of resources or goods among
the people is considered fair.
 But however the markets do not always
produce a fair distribution of income. even
the most efficient market system may
generate inequality.

20.  The reason is that incomes are determined
by a wide variety of factors including effort,
education, inheritance, factor prices etc.
 One example would be.
 Every year the Forbes magazine lists the 400
richest Americans and its impressive that
many of them either received their wealth
by inheritance or used their inherited wealth
to gain even greater wealth.

21.  Also income distribution may be politically or
ethically unacceptable. If a democratic
society(government) does not like the
distribution of income in the market system
.It can take steps to change the distribution
of income.

22. Business cycle???
 The recurring and fluctuating
levels of economic activity that
an economy experiences over a
long period of time. Basically
inflations and recessions..
 To deal with these types of
economic instabilities the
government uses its Fiscal and
Monetary policies

23.  It refers to a government’s spending and taxation
policies intended to maintain economic stability.
 Indicated by levels of unemployment, interest
rates, prices and economic growth.
 Eg: In order to curb price inflation associated
with high levels consumer spending. The
government may institute higher taxes resulting
in lower levels of disposable income. Likewise
the government may engage in public spending
in order to increase the economy’s cash flow
during times of recession.

24.  Refers to a range of measures by which the
government. Through the central banks, try
to affect a Nations money supply, it interest
rates or both.
 Here the central banks respond to current
economic conditions and try to protect the
value of money against inflation.
 Eg :open market operations, changing
reserve requirements and setting the
discount interest rate.

25.  It is one in which the market determines output
and prices in most individual sectors while the
government steers the overall economy with
programs of taxation, spending, and monetary
regulation.
 Eg ; The United States is considered a mixed
economy because although the factors of
production are owned by the private sector, the
government does get involved in decisions.It
determines what infrastructure will be built, it
also has passed laws putting many restrictions
and regulations upon the private industries.( for
me.. minimum wage laws ,anti-pollution laws
etc.)

26.  Governments harness private ingenuity
through the market mechanisms to help
achieve certain social aims.
 An efficient and humane society requires
both halves of the mixed society-market and
government.

27. Group 1