Chapter 1: The Power of Market…

Chapter 1: The Power of MarketsWhat are the two basic assumptions that economists make about individuals and firms? One of these two basic assumptions is that individuals seek to make themselves as well of as possible, however each of these individuals choose to define it. Our main point of interest is to make decisions in whatever way possible in order to work with our biggest needs. The other basic assumption revealed in this chapter is about firms and how they try to make as much money as possible, as most businesses strive to do. All people involved with these firms, like entrepreneurs, try to make more money for these firms in order to balance with their personal needs.What is the role and significance of prices in the market economy? The market economy is very important in our own society today. One of its traits is that it directs resources to their most productive use, making sure not to waste materials that could be used in other branches of business. They help to establish how prices in this form of economy play a huge role. Prices in the market economy help to determine the income and outcome of every specific item, and how they will balance between the supply and demand of all of these materials. Without these prices, some materials would flood the entire environment while we find to lack other essential materials in the process.What’s so great about a market economy anyway? The great thing about a market economy is that although it may show its flaws, it is our best option. It has its tight restrictions but never will it restrict us completely of what we should spend our money on. It allows us to excel with hard work and patience, as we can be rewarded in the process with leisure or luxury.Explain how each of the following relates to efficient outcomes in a market economy:a. Adverse selection – This term refers to how the uniform pay scale creates a set of incentives. It relates to efficient outcomes because it applies people to their highest form of education to help society excel, all of which is exercised through the form of payment for certain jobs. b. Perverse incentives – These are addressed by economists as inadvertent incentives that can be created when we set out to do something completely different. These are involved with efficient outcomes because with the good perverse incentive comes the bad, and these bad incentives need to be steered clear from in order to maximize our economic efficiency within the governmental system, as it has been demonstrated in various, past situations. c. Principal-agent problem – This term is associated with the problem how the agents who own some of the largest corporations in America are not the principals who own these companies. These principals are the shareholders of these large corporations, and they may suffer from the big CEO agents and their decisions, because some of those agents might not work in the best interest of each and every one of its shareholders. In terms of efficient outcomes, this problem needs to be tackled in a way so that managers, shareholders, and even employees can all work in unison so that the economic development and growth of the company can be improved and expanded. d. Prisoner dilemma – This is a form of behavior in which rational individuals acting in their own best interest In your own words explain what an externality is. An externality is the outcome of certain economic behaviors, resulting in the difference between the private cost and social cost for certain items. This “externality” can provide individuals with motive to produce for themselves in disregard to others. They can also create different policy issues and can be brought to the point where government must regulate them.Besides addressing externalities, what other important and beneficial roles does government play in our market economy? It is eminent that government controls a large part of how our taxes are priced and applied. They also help to provide for the public services, and protect them from being crushed by the humongous, private services. Another thing the government does is counteract large-scale monopolies and the raised prices tha come with it. Despite the restrictions that the government sets on our market economy, we can only be grateful for they made it possible in the first place.What are the main reasons why government should only take a limited role in a market economy? Markets work because resources flow to where they are valued most. If the government want this market economy to keep this natural flow, they must refrain from strict regulation, as it would interfere with that process. With this free function, the market economy can accomplish efficient outcomes and only require a little support with public goods. This needs some restraint because the market economy can easily become disorganized and can result in market failure in the process.

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