Microeconomics 1.2

Principle 5 - Trade Can Make Everyone Better Off

Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.

Principle 6 - Markets Are Usually a Good Way to Organize Economic Activity

Markets can allocate resources better than governments can.

Market Economy

The decisions of a central planner are replaced by those of millions of firms and households. Firms decide whom to hire and what to make. Households decide where to work and what to buy with their incomes.

Adam Smith & The Invisible Hand

Firms and households in competitive markets act as if they are guided by an “invisible hand” that leads them to desirable outcomes. One of the chief goals of this book is to understand how this invisible hand works its magic.

Principle 7 - Governments Can Sometimes Improve Market Outcomes

We need government is that 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.

Property Rights

Individuals can own and control scare resources.

Two Broad Rationales for Government Intervention

To promote efficiency or to promote equality. That is, policies can aim either to enlarge the economic pie or to change how the pie is sliced.

Market Failure

To refer to a situation in which the market does not produce an efficient allocation of resources on its own.

Externality

The impact of one person’s actions on the well-being of a bystander.

Market Power

The ability of a single person or firm (or a small group of them) to unduly influence market prices.