Hackett Reading

This chapter provides a introduction to Market Capitalism. Parson’s powerpoint slides do a great job of explaining the main concepts present in this chapter but it is still a good idea to go over the specific definitions put forth.

Market Capitalism
The socioeconomic system in which scarce resources are allocated by way of a complete set of decentralized markets. (by decentralized they just mean that the allocation takes place as a result of aggregation of individual market transactions.)

Conditions for a well functioning market:
Note: If all of these conditions are not met—which they seldom are—then market failure can occur.

  1. There are well defined and enforceable property rights.
  2. There is a functioning market institution that regulates the interactions between buyers and sellers.
  3. No individual buyer or seller has market power.
  4. Buyers and sellers are unable to collude.
  5. There are no positive or negative externalities. (hardly ever happens)
  6. There is always potential for the entry of new buyers and sellers.
  7. Transaction costs are low.
  8. Buyers and sellers have perfect information.
Market Demand
It is assumed that consumers want to maximize their utility (happiness). The demand curve represents the aggregation of all Consumers’ price preferences. One of the underlying assumptions in economics is that a consumers per unit utility decreases for every additional unit consumed/purchased. This is the law of diminishing marginal utility. On another note, there is usually and inverse relationship between price and quantity demanded, hence the downward slope of most demand curves.
Market Supply
It is assumed that Sellers want to maximize their profits. The supply curve represents the aggregated selling prices/per unit demanded for all suppliers. (In a competitive market seller’s supply along their marginal cost curve.)
Law of Diminishing Marginal Returns
As more and more of a variable input is added to a fixed input, the marginal productivity of each successive unit will become smaller.
Market Equilibrium
This occurs when the quantity demanded by consumers equals the quantity provided by sellers.
Consumer Surplus
This represents that value earned by consumers when their willingness to pay is higher than the selling price. Basically, they would have paid more for the purchased good than they had to and that makes them feel good.
Producer Surplus
This is when a Producer is able to sell their product for more than the costs of producing it. PROFIT!