DR. ANN DAVISASSOCIATE PROFESSOR OF ECONOMICS

MARIST COLLEGEANN.DAVIS@MARIST.EDU

Principles of MicroEconomicsFall, 2012

What is for sale for money and what isn’t? What’s the difference?

What have you noticed for sale on the streets of Florence?

Any examples?

Definition of Economics

Economics is the study of production, distribution, and consumption of necessities and other products

At the same time, income distribution and economic security are also involved.

Modern economies are organized by means of markets, a specific set of institutions that has evolved since early 16th century

Markets exist once production of commodities for the sole purpose of sale and profit is well established

Commodities and Markets

A commodity is a useful product which is produced primarily for the purpose of sale for profit

Firms are usually engaged in commodity production

Firms are able to sell commodities in markets, where consumers can purchase these commodities for money at prices set by supply and demand

Sometimes markets are given specific locations (the mall) or given capacities (trading on eBay)

Requirements for Markets

Private propertyLegal protection Currency as legal tender (payable for debts,

taxes)Financial system for loans and deposits (credit)Purchase of inputs like labor, machinery, and

raw materials with moneySpace for production, distribution, retail saleOwnership of product by firms, or by

consumersSale for money for a price set by supply and

demand

Battistero di San Giovanni

Gold sculpture on the doors of the Battistero

(Doors of paradise by Ghiberti in 1425-1452, bronze with gilt highlights, restored in 1948 and 1966; the originals are now stored in the Museum of the Opera del Duomo)

CommodityCommodity Not a commodityNot a commodity

Gold jewelry sold in shops on the Ponte Vecchio

Gold doors of paradise on the Battistero di San Giovanni

Examples from Florence

Other Examples?

Major Institutions Related to the Modern Economy

Government

Markets

Home

Ecology (Natural Resources)

Market Forces

Incentives for action based on a change in price of a commodity, for buyers and sellers of that commodity

For profit-making firms, market forces can mean lowering prices if a competitor is selling the same product more cheaply

For workers, market forces can mean accepting a less pleasant job or a lower wage, because that is all that employers are offering (at a given time or place)

Both Sides

How to argue both sides?Careful Methodology:Objective informationAuthoritative sourcesLogical coherenceClear definitionsMultiple points of viewArticulate underlying values

Are Markets Everywhere?

YesMarkets are

everywhere, wherever there is a need to be filled, and wherever there is a person willing to supply a need (ex. Sleep;

ex. marriage)

NoMarkets are legally

organized for sale of commodities for money

Markets developed historically, first in Europe in the 16th century, and then expanded rapidly during the Industrial Revolution (ex. Textiles)

Yes, Markets Are Everywhere

Any wish is potential demandAnything I own is potential supplyAnyone can develop a business; all it

takes is initiative and imaginationI can sell anything that I am willing to

part withGovernment is not necessary for markets

to work well

No, Not Everything is For Sale

A wish must be backed by purchasing power, to be fulfilled; cash; effective demand

There are laws against selling certain items, and setting certain conditions

Controlling the money supply, maintaining courts and jails, stabilizing the economy, providing for public goods and externalities are tasks conducted by government, as well as protecting property and enforcing contracts

Established buyers and sellers, and critical mass, help markets work more efficiently

Resolution

Actual markets are not the same as potential markets

Actual markets require legal authorization to sell commodities, as well as established buyers and sellers, money, and critical mass for predictable prices

Actual markets can be described in terms of time, place, suppliers, workers, customers, price

Potential markets can be spotted by entrepreneurs, for future development

One Text’s Contribution

Economic Forces(Potential Markets):Real world rationing

mechanisms in response to scarcity (such as first come, first served; seniority; lottery; merit; membership; do-it-yourself; sharing with a friend; government production for use)

Market Forces(Actual Markets):Allocation of scarce

resources by price (determined by supply and demand in the market)

Legal ownershipBuying and selling

commodities for money

Reference to Self Interest as Criterion

Markets are everywhere: human nature is based on individual self-interest and rationality; everyone acts as if markets are everywhere.

Markets exist only when commodities are traded for money; human nature is basically cooperative; the family and government are based on common interest and public good; only the economic system of capitalism is based on individual self-interest

Is There an Actual Market for Kidneys?

Yes No

Is There Be a Potential Market for Kidneys?

Yes No

Is there a market for kidneys?Is there a market for kidneys?

Should there be a market for kidneys?Should there be a market for kidneys?

Does the provision of kidneys in the US meet the criteria for markets (an empirical question)?

Would we be better served if there were a market for kidneys (a question based on values)?

Positive vs. Normative Economics

Other Criteria for Markets

One key criterion for markets is the existence of a wage labor force

That is, people who 1) do not live on farms, 2) do not have enough resources to start their own businesses, and 3) cannot get welfare must work for someone else.

Without wages, such people would have no way to eat (since necessities are only offered for sale for cash)

Positive DimensionsPositive Dimensions Negative DimensionsNegative Dimensions

Motivation to work; incentives

Reward for effort

Threat of starvation if there are not enough jobs available

Humanity is reduced by treating workers as a “commodity,” an object for sale

Wage Labor Force

More Market (US, UK)More Market (US, UK) Less Market (Europe)Less Market (Europe)

Fewer options to wage labor, to increase worker incentives

The best things in life are the financial rewards to hard work

More security to assure basic necessities

More government provision of public goods such as education, health, public parks, and infrastructure

Varieties of Capitalism

Discussion Question

What are the current trends in the world economy today, more market or less? Examples?