MARKETS AND GOVERNMENT

IN A MODERN ECONOMY
ECONOMICS
Paul A. Samuelson and William D. Nordhaus
19th Edition, McGraw – Hill, 2010
Chapter 2.

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Part One – Chapter 2
BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

 Market Mechanism,
is a mechanism through which buyers and
sellers interact to determine price and
exchange goods and services,
 Market Equilibrium,
represents a balance among all the
different sellers and buyers,  market
clear,  price coordinate the decision of
producers and consumers in the market

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BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

HOW MARKETS SOLVE THE THREE ECONOMIC

PROBLEMS
The market System relies on Supply and Demand to Solve the Trio of
Economic Problems

PRODUCT MARKETS
Price on Product Markets

Consumer Rps Votes Rps Cost of Production

what,
CONSUMERS how, BUSINESS
for whom
Ownership of Inputs Productivity of Factor

Price on Factors Markets,

Wages, rents, interests
FACTORS MARKETS

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BASIC CONCEPT – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

ADAM SMITH AND THE INVISIBLE HAND,

 Adam Smith, Founding Father of Economics,

1723 – 1790
 An Inquiry into the Nature and Causes of the Wealth
of Nations,
 Classical Economics  laissez – faire  competitive
market economy
 Invisible Hand  self regulating  automatic
adjustment

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BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

TRADE, SPECIALIZATION AND DIVISION OF

LABOR,
SUBSISTANCE ECONOMY
The economic of Robinson Croesoe

DIVISION OF LABOR

SPECIALIZATION
International Specialization

EXCHANGE – TRADE
International Exchange - Trade
LOCAL,
DOMESTIC  Rps
MONEY, THE LUBRICANT
BARTER
OF EXCHANGE
INTERNASIONAL,
Rps  USD

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BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

THE NATURE AND FUNCTION OF MONEY

 The nature of money  any kind of commodity 
paper and coin  trusts and acceptability
 The function of money,
 Measured of Value,
 Medium of Exchange,
 Store of Wealth,
 Monetary Authority  The Central Bank  control
the money supply

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BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

The Economic Role of Government

 To increase efficiency by promoting competation,
curbing externalities like pollution, and providing
public goods
 To promote equity by using tax and expenditure
program to distribute income toward particullar
group,
 Government foster macroeconomic stability and
growth  reducing unemployment and inflation
while encouraging economic growth  through fiscal
policy and monetary regulation.

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BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY
Government Can Remedy the Shortcommings of the Market,
Failure of Market Economy Government Current Example of
Intervention Governmen Policy
In-Efficiency, Encourage Anti Trust laws, Deregulation,
competatition, Anti Pollution Laws, Anti
Monopoly, Smoking Ordinances, Build
Intervene to markets,
Externatilies, Guidance System, and Provide
and Encourage Public Educations
Public Goods beneficial activities
In-Equality, Progressive taxation of
Un-Acceptable In- Redistribute Income Income and Wealth,
Equalities of Income and and Wealth Income support and
Wealth tranfer Program

Macroeconomic Monetary Policies  Control the

Problems, Money Supply and Interes,
Stabilize through Fiscal Policies  Taxes and
Business Cycles and Slow macroeconomic policy, Spending program, Improve
Economic Growth and stimulate growth efficiency of tax system, Raise
Savings Rate by Reducing
Budget Deficit or Increase
Budget Surplus

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Part One – Chapter 2
BASIC CONCEPTS – MARKETS AND GOVERNMENT IN A
MODERN ECONOMY

 Assigment  Question for Discussion,

Chapter 2
 Due Date,
 Sent To :

Thank You