Module B

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24/02 MARKETS, EFFICIENCY AND MARKET FAILURES Resources are scarce, there is a limited amount of resources. When resources are scares there are three key issues to solve: - What to produce à food or weapons? If more food, less weapons - How to produce à in the most efficient way not to waste resources - How to distribute the wealth that results of production The mechanism of price is the best way to solve these issues: markets. A market enables buyers and sellers to interact and, thus, to determine the equilibrium price and quantity of a good. - Almost every good has a price measuring monetary value - Prices channel information on buyers’ willingness to buy and sellers’ willingness to sell - Prices are the terms under which buyers and sellers exchange goods What to produce: what buyers vote How to produce: depends on efficiency considerations: Usually at the minimum costs to be efficient. To produce at the minimum costs = competition To increase price (earning a premium price): innovation To reduce costs: process innovation (automation, etc.) There is another innovation to reduce costs: organizational innovation. We can reduce costs by better organizing the processes (ex. reduces costs of organizing production and commercialization of goods). Wealth distribution: it depends mainly on demand and supply in the markets for inputs. There are markets for outputs and markets for inputs. Wealth distribution depends on markets for inputs and the way markets for inputs works is very similar to the way markets for output works. We have prices also in markets for inputs. Markets for inputs determine salaries, which are the prices of individuals’ spare time. The rarer your skills, the more expensive is your spare time. The wealth distribution depends on the price of the input, and…