1. 178.307 Markets, Firms and Consumers Lecture 1- Introduction to the Market Economy

2. Lecture Overview Administration – Workshops – Test (Wenesday 5 April) – Assignment (next week) Expectations – Participation One can succeed at almost anything for which he has enthusiasm Charles Schwab

3. Course Overview The Market Economy The Firm Input Markets Internal Processes Exogenous Organisations

4. Key Points Course in Microeconomics Narrower Focus Emphasise Firms Economic Theory Applications Mathematical Economics

5. Why Mathematics? Economics is a discipline that depends on logical reasoning. Experimentation provides ‘less decisive’ results.

6. The Market Economy “Two women and a goose make a market” Markets are widely used to organise production, allocate consumption goods. Markets are not the only form of organsiation. Other organisations – Internal allocations within a firm – Production and consumption decisions within a family – Soviet-style planned economy

7. Markets and Efficiency Mid-20 th C debates did not always see markets as more efficient – E.g. Nationalisations in the post-war period – Viability of Socialist Planning Empirical evidence is that markets are ‘efficient’:

8. Medicare Processing Performance and Ownership

9. Efficiency of Markets Private Property – Ius possendi – Ius utendi – Ius abutendi → right of disposition Rights have to be enforceable and enforced Poland – Market Socialism

10. Markets as a Spontaneous Order Hayekean Argument Markets are not ‘designed’ (just like language) They persist in hostile circumstances – Black Markets in USSR They overcome ‘preference’ for family/tribe. This increases scope for “exchange”

11. Markets and Dispersed Knowledge Hayekean Argument Knowledge is dispersed in an economy – E.g. franchising and professional partnerships Knowledge is not the same as information Knowledge may not be ‘codifiable’. Markets draw upon such knowledge – Smith’s analogy of the ‘Invisible Hand’. Soviet-style economies could not use this knowledge.

12. Non-codified Knowledge

13. Markets as a Discovery Process Rivalrous market competition is the process that generates knowledge about production processes Freely adjusting market prices are important They correct errors in perception Prices capture more than ‘just’ relative scarcities

14. References Hayek and Socialism http://links.jstor.org/sici?sici=0022- 0515%28199712%2935%3A4%3C1856%3AHAS%3E2.0.CO%3B2-Q What does it take for a Market to function- Davidson and Weersink http://links.jstor.org/sici?sici=1058- 7195%28199823%2F24%2920%3A2%3C558%3AWDITFA%3E2.0.CO%3B2- F