Solutions And Summary To Chapter 3 Of Managerial Economics And Organizational Architecture, Brickley, Smith & Zimmerman.

2511 words - 10 pages

GOALS OF ECONOMIC SYSTEMSEvery economic entity is confronted with three basic issues1. what to produce2. how to produce it3. how to allocate the final outputOrganization:National economiesCentral planningFree MarketsFirms and HouseholdsCentralized decision makingOne authority for decision makingPareto efficiencyA distribution of resources where there are no alternative allocations that keeps all individuals at least as well off but makes even one person better off. When there is an efficient allocation of resources, all members are equal. In Pareto some are better off.Property Rights and Exchange in a Market EconomyProperty Right: legally enforced right to select the uses of an economic good.Ownership: involves use rights and alienability rights.Gains from TradePeople buy and sell to make themselves better off. Trade is when the buyer places a higher value on the item of the seller. Gains from trade make both parties better off. Mutually advantageous. Gains form trade come form individual preferences, since people place different values on items according to their preferences.Comparative advantages: specialization of a good.A common misconception is that trade takes place because people have too much of some goods.Trade is an important form of value creation., providing important incentives to move resources to more productive uses.BASICS OF SUPPLY AND DEMANDMARKET PRICE SYSTEM - THE PRICE MECHANISMMarket includes all potential buyers of a certain product.Competitive market: many buyers and sellers and individual transactions are so small in relation to the market that the price is unaffected by any single sale or purchase.Demand curve depicts how many people are willing to buy a product at each price.It slopes downward because people will buy more if products have lower prices.Supply curve depicts how many producers are willing to sell at each price. At a higher price, sellers are willing to sell more products, upward slope.Two curves cross at the market clearing price, where the quantity of products demanded equals the quantity of products supplied. This is when a market is in equilibrium.Strong pressures push markets to equilibrium. Supply and demand diagrams are snapshots at a pointing time. As time passes, both change.LINEAR SUPPLY AND DEMANDSupply function. Qs involves market price of product supplied and wages paid to workers. Supply curves show the relation between price and quantity supplied holding all other factors constant.Demand function Qd involves per capita income and price of the product.Equilibrium is when Qd equals QsPRICE AS A SOCIAL COORDINATORSPrices play crucial roles to coordinate consumption and production decisions of individuals.If everyone trades n the marketplace and all mutually advantageous trades are completed, the price system results in Pareto efficient resource allocation without any government intervention.EXTERNALITIES AND THE COASE THEOREMExternalities exist when the actions of one party affect the well being...

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