2. REASONS WE NEED GOVERNMENT IS THAT:
1. THE INVISIBLE HAND CAN WORK ITS MAGIC ONLY IF THE GOVERNMENT
ENFORCES THE RULES AND MAINTAINS THE INSTITUTIONS THAT ARE KEY TO A
MARKET ECONOMY.
3. INVISIBLE HAND
ADJUST THE QUANTITY OF DEMAND AND SUPPLY TO MEET TOGETHER IN A
PINT WHERE THE QUANTITY OF DEMAND IS EQUAL TO THE SUPPLY.
THE INVISIBLE HAND REFERS TO THE SELF-REGULATING NATURE OF THE
MARKETPLACE IN DETERMINING HOW RESOURCES ARE ALLOCATED BASED ON
INDIVIDUALS ACTING IN THEIR OWN SELF-INTEREST.
4. GOVERNMENT
A GROUP OF PEOPLE THAT GOVERNS A COMMUNITY OR UNIT.
IT SETS AND ADMINISTERS PUBLIC POLICY AND EXERCISES EXECUTIVE,
POLITICAL AND SOVEREIGN POWER THROUGH CUSTOMS, INSTITUTIONS,
AND LAWS WITHIN A STATE.
• MOST IMPORTANT, MARKETS WORK ONLY IF PROPERTY RIGHTS ARE
ENFORCED.
PROPERTY RIGHTS
THE ABILITY OF AN INDIVIDUAL TO OWN AND
EXERCISE CONTROL OVER SCARCE RESOURCES
5. 2. THE INVISIBLE HAND IS POWERFUL, BUT IT IS NOT OMNIPOTENT.
TWO BROAD REASONS
TO PROMOTE EFFICIENCY
TO PROMOTE EQUITY
EFFICIENCY
ECONOMISTS USE THE TERM:
MARKET FAILURE
REFER TO A SITUATION IN WHICH THE MARKET ON ITS
OWN FAILS TO PRODUCE AN EFFICIENT ALLOCATION OF
RESOURCES.
6. POSSIBLE CAUSE OF MARKET FAILURE:
• EXTERNALITY - THE IMPACT OF ONE PERSON’S ACTIONS ON THE WELL- BEING
OF A BYSTANDER.
EXAMPLE: POLLUTION
• MARKET POWER - THE ABILITY OF A SINGLE ECONOMIC ACTOR (OR SMALL
GROUP OF ACTORS) TO HAVE A SUBSTANTIAL INFLUENCE ON MARKET PRICES.
EQUITY
THE INVISIBLE HAND MAY ALSO FAIL TO ENSURE THAT ECONOMIC PROSPERITY
IS DISTRIBUTED EQUITABLY.
A MARKET ECONOMY REWARDS PEOPLE ACCORDING TO THEIR ABILITY
TO PRODUCE THINGS THAT OTHER PEOPLE ARE WILLING TO PAY FOR.
EXAMPLE: BASKETBALL PLAYER EARNS MORE THAN THE WORLD’S
BEST CHESS PLAYER
7. PRINCIPLE 8:
A COUNTRY’S STANDARD
OF LIVING DEPENDS ON ITS ABILITY
TO PRODUCE GOODS AND SERVICES
8. •IN 2003, THE AVERAGE INCOME OF:
AMERICAN $37,500
MEXICAN $8,950
NIGERIAN $900
• THIS LARGE VARIATION IN AVERAGE INCOME IS REFLECTED IN VARIOUS
MEASURES OF THE QUALITY OF LIFE. CITIZENS OF HIGH-INCOME COUNTRIES
HAVE MORE TV SETS, MORE CARS, BETTER NUTRITION, BETTER HEALTHCARE,
AND A LONGER LIFE EXPECTANCY THAN CITIZENS OF LOW-INCOME
COUNTRIES.
9. • ALMOST ALL VARIATION IN LIVING STANDARDS IS ATTRIBUTABLE TO
DIFFERENCES IN COUNTRIES’ PRODUCTIVITY.
PRODUCTIVITY
THE QUANTITY OF GOODS AND SERVICES PRODUCED
FROM EACH HOUR OF A WORKER’S TIME.
• THE RELATIONSHIP BETWEEN PRODUCTIVITY AND LIVING STANDARDS
ITS IMPLICATIONS ARE FAR-REACHING.
ITS IMPLICATIONS FOR PUBLIC POLICY.
