Transcript Document 7374035

Chapter 2: Markets and
government in a modern
economy
1. what is market and what is the
invisible hand
2. how market solve the basic
economic problems
3. the economic role of government
4. Different terms
5. trade, Money and Capital.
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Learning Objectives
• 1. Describe what is meant by
the term market and describe
the process of achieving
equilibrium in a market
economy.
• 2. Use your definition of market
equilibrium to address three
basic economic problems that
confront all societies.
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Objectives
• 3. Explain how the price system
works as an invisible hand,
allocating goods and services in a
market economy.
• 4. Use a circular-flow diagram to
illustrate the relationships
between agents and markets in a
modern economy.
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Objectives
• 5. Make a case for
government intervention in a
mixed market economy in
order to promote efficiency,
equity, and macroeconomic
growth and stability.
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Market definition
• A market is the institution
through which buyers and
sellers interact and engage in
exchange.
• A market economy has at its
heart the actions of buyers and
sellers who exchange goods
and services with one another.
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A. What Is a Market?
• There is no higher authority that
directs the behavior of these
economic agents; rather, it is
the invisible hand of the
marketplace that allocates final
goods and services, as well as
factors of production.
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Markets
• Buyers and sellers receive
signals from one another in the
form of prices. If buyers want to
buy more of a good, prices rise
and sellers respond by
supplying more to the
marketplace.
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Markets
• If buyers want to buy less of a
good, prices fall and sellers
respond by supplying less to the
marketplace.
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Markets
• Market equilibrium occurs when
the price is such that the quantity
that buyers are interested in
purchasing is equal to the
quantity that sellers are
interested in supplying to the
market.
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Markets
• The market mechanism allows
an economy to simultaneously
solve the three economic
problems of what, how, and
for whom.
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Economic problem
• The economic problem: Given
scarce resources, how, exactly,
do large, complex societies go
about answering the three basic
economic questions?
• To answer the three basic
questions we need to study the
economic systems.
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Economic Systems
• Economic systems are the
basic arrangements made by
societies to solve the
economic problem.
• They includes four systems:
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Systems
1.
2.
3.
4.
Islamic economy
Laissez-faire economies
Command economies
Mixed systems
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Islamic Economy
• Some people think that Islam
has no economic system of its
own
• Islamic Economics is as Old as
Islam Itself
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Islamic Economy
• Islamic economics is
accordance with Islamic law .
• Islamic economics can refer to
the application of Islamic law to
economic activity either where
Islamic rule is in force or where
it is not;
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I.E
• i.e. it can refer to the creation
of an Islamic economic system,
or to simply following Islamic
law in regards to spending,
saving, investing, giving, etc.
where the state does not follow
Islamic law.
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Definition of Islamic
economics
• The Islamic economics is both a
science and an art which deals with
the daily routine of a Muslim's
economic life.
• i.e. how he earns his income and
how he spends it. It is a science in
the sense that it involves many
scientific methods in the production
of material goods, their distribution
and consumption .
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Principles
• The Islamic economic system is
directly guided by Allah
Almighty Himself .
• all important aspects of the
Islamic economic system and
the applicable norms are
thoroughly discussed in the
Holy Quran
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Cont.
• Allah created all needed
provisions so that they may
consume them and may satisfy
their wants
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Other principles
1. All wealth belongs to Allah (SWT(
2. The Muslims are the custodians
and trustees of the wealth.
3. Hoarding the wealth is forbidden.
4. Circulating the wealth is obligatory
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‫•‬
‫•‬
‫•‬
‫•‬
‫‪21‬‬
‫كل الثروة مملوكة وترجع إلى هللا تعالى‬
‫المسلمون هم الحراس واألمناء على الثروة والمال‬
‫اكتناز الثروات ممنوع‬
‫تعميم وتدوير هذه الثروة واجب‬
The free market system
• In a laissez-faire economy,
individuals and firms pursue their
own self-interests without any
central direction or regulation.
• The central institution of a laissezfaire economy is the free-market
system.
• A market is the institution through
which buyers and sellers interact
and engage in exchange.
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Consumer sovereignty
• Consumer sovereignty is the idea
that consumers ultimately
dictate what will be produced (or
not produced) by choosing what
to purchase (and what not to
purchase).
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Free enterprise
• Free enterprise: under a free
market system, individual
producers must figure out how
to plan, organize, and
coordinate the production of
products and services.
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distribution of output
• In a laissez-faire economy, the
distribution of output is also
determined in a decentralized
way. The amount that any one
household gets depends on its
income and wealth.
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Free System
• The basic coordinating mechanism
in a free market system is price.
Price is the amount that a product
sells for per unit. It reflects what
society is willing to pay.
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Command economies
• In a command economy, a
central government either
directly or indirectly sets output
targets, incomes, and prices.
• And the government determine
what to produce and how much
and How and for Whom to
produce.
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Mixed Systems, Markets, and
Governments
Since markets are not perfect,
governments intervene and
often play a major role in the
economy.
Some of the goals of
government are to:
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goals of government in
mixed economy
• Minimize market inefficiencies
• Provide public goods
• Redistribute income
• Stabilize the macro economy:
• Promote low levels of
unemployment
• Promote low levels of inflation
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The Market System Relies on Supply and Demand to
Solve the Trio of Economic Problems
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The Basic Decision-Making
Units
Firms and
Households and An
entrepreneur
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A firm
• A firm is an organization that
transforms resources (inputs)
into products (outputs). Firms
are the primary producing units
in a market economy.
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An entrepreneur
• An entrepreneur is a person
who organizes, manages, and
assumes the risks of a firm,
taking a new idea or a new
product and turning it into a
successful business.
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Households
• Households are the consuming
units in an economy
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Input Markets and Output
Markets: The Circular Flow
• The circular flow of
economic activity
shows how firms and
households interact
in input and output
markets.
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B. Trade, Money, and
Capital
• Advanced economies use
complex systems of trade in
order to accumulate the bundle
of goods and services that the
people in that economy want to
consume.
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Cont.
• People produce the goods and
services that they can produce
most efficiently, and then they
trade their excess for other
items that they need.
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Money
• Money is not an input or factor
of production. Consumers and
firms use money in order to
more efficiently carry out
market transactions; it is a kind
of lubricating oil that allows the
machinery of an economy to
operate with a minimum of
friction.
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Capital
• In this course, the term capital
does not refer to money. Instead,
the term refers to productive
inputs.
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Cont.
• capital includes durable items like
factory buildings, machine tools,
electric drills, jack hammers, and
so on. It also includes stocks of
semi finished goods. These are
goods which are on the way to
becoming consumer goods but
which are still manufactured
inputs to be used in later stages
of the production process.
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Capital accumulation
• Capital accumulation is an
important determinant of
economic growth. An economic
system that builds a strong
capital base is investing in a
factor of production that will
make all other factors more
productive or useful.
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The Economic Role of
Government
• In the real world, markets do
not always operate as smoothly
as we might like. Market
imperfections lead to a wide
range of problems, and
governments step in to address
them.
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Gov. intervention
• Governments intervene in a
market economy in order to
promote efficiency.
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Role of Government
• Market allocations are only
efficient when conditions of
perfect competition hold; this
means that no firm or consumer is
large enough to affect input or
output market prices.
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con
• When there are many small
firms in a market, competition
forces all firms to operate
with lowest possible costs
and prices.
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Role of Government
• Market allocations become
inefficient when externalities
occur. Externalities are the
positive or negative effects on
outside parties that production or
consumption in an industry yields.
For example,
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Cont.
• When people receive
education, schools and
students benefit, but so do
others in the community who
now have neighbors who are
better educated.
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Role of Government
• Governments intervene in a
market economy in order to
promote equity, or fairness, in the
distribution of resources and
income.
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Cont.
• This is a difficult concept
because there is no universal
definition of fairness. Markets
distribute goods and services
to those who have the money
to purchase them, not
necessarily to those who need
or deserve them the most.
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Role of Government
• Governments intervene in a
market economy in order to
promote macroeconomic growth
and stability using monetary and
fiscal policy.
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Fiscal policies
• Fiscal policies of government
(the power to tax and spend)
that try to affect the
economic stability
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Monetary policy
Includes:
• interest rate policies
• Money creation and issuing
• So It is (the power to adjust
the money supply and interest
rates)
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The effect of M. & F.
policy
• M. & F. policy help to move an
economy along a stable path,
avoiding periods of excessive
inflation and unemployment.
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