Modules B C D Markets and market failure theories and bounderies of the firms

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1 MODULE B, MARKETS AND MARKET FAILURE: Markets, efficiency and market failure: Market is a physical or online platform that enables buyers or seller to interact. The agents who interact for a market are citizens and firms, the interactions determine the price and the quantity of the good. In a market economy, markets are the economic organizations, which solve three key issues: 1) What to produce: What to produce is determined by the “one dollar, one vote” mechanism (individuals determine what is produced): 1) Buyers “vote” their preferred goods by daily purchasing them; 2) Their purchasing decisions determine sellers’ revenues and profits; 3) Sellers want to sell their goods, and, ultimately, maximize their profits. To this end, they - Increase the production of goods that do receive buyers’ votes; - Decrease the production of goods that do not receive buyers’ votes. 2) How to produce: How to produce depends on efficiency considerations given resource availability. Competition among sellers forces them to: - Reduce cost in order to reduce prices; - Engage in product innovation (to earn a premium price), process innovation (to reduce production costs) and organizational innovation (to reduce the cost of organizing production and commercialization of outputs). 3) How to distribute the wealth generated through production: Wealth distribution depends mainly on demand and supply in the market for inputs, to put it simple: - Goods are produced using inputs, which are exchanged on the markets for inputs; - For instance, markets for inputs determine salaries, which are the prices of individuals’ spare time; - The more valuable the inputs possessed by individuals, the higher the share of the wealth they capture; - Thus, wealth distribution in a society depends on the prices…