Not Chaos but Economic Order
The market looks like a jumble of different sellers and buyers. It seems almost a miracle that food is produced in suitable amounts, gets transported to the right place, and arrives in a palatable form at the dinner table. But a close look at New York or other economies is convincing proof that a market system is neither chaos nor miracle. It is a system with its own internal logic. And it works. A market economy is an elaborate mechanism for coordinating people, activities, and businesses...
Cool Heads At The Service Of Warm Hearts
Economics has, over the last century, grown from a tiny acorn into a mighty oak. Under its spreading branches we find explanations of the gains from international trade, advice on how to reduce unemployment and inflation, formulas for investing your retirement funds, and even proposals for selling the rights to pollute. Throughout the world, economists are laboring to collect data and improve our understanding of economic trends. You might well ask, What is the purpose of this army of...
C The Economic Role Of Government
An ideal market economy is one in which all goods and services are voluntarily exchanged for money at market prices. Such a system squeezes the maximum benefits out of a society's available resources without government intervention. In the real world, however, no economy actually conforms totally to the idealized world of the smoothly functioning invisible hand. Rather, every market economy suffers from imperfections which lead to such ills as excessive pollution, unemployment, and extremes of...
Twilight Of The Welfare State
In 1942, the great Austria-born Harvard economist Joseph Schumpeter argued that the United States was capitalism living in an oxygen tent on its march to socialism. Capitalism's success would breed alienation and self-doubt, sapping its efficiency and innovation. But he was wrong. The next half-century saw sustained growth in government's involvement in the economies of North America and Western Europe along with the most impressive economic performance ever recorded. Rapid economic growth has...
Interpreting Changes in Price and Quantity
Let's go back to our bread example. Suppose that you go to the store and see that the price of bread has doubled. Does the increase in price mean that the demand for bread has risen, or does it mean that bread has become more expensive to produce The correct answer is that without more information, you don't know it could be either one, or even both. Let's look at another example. If fewer airline tickets are sold, is the cause that airline fares have gone up or that demand for air travel has...
Trade Specialization And Division Of Labor
As compared to the economies of the 1700s, today's economies depend heavily on the specialization of individuals and firms, connected by an extensive network of trade. Western economies have enjoyed rapid economic growth as increasing specialization has allowed workers to become highly productive in particular occupations and to trade their output for the commodities they need. Specialization occurs when people and countries concentrate their efforts on a particular set of tasks it permits each...
How To Read Graphs
A picture is worth a thousand words. Before you can master economics, you must have a working knowledge of graphs. They are as indispensable to the economist as a hammer is to a carpenter. So if you are not familiar with the use of diagrams, invest some time in learning how to read them it will be time well spent. What is a graph It is a diagram showing how two or more sets of data or variables are related to one another. Graphs are essential in economics because, among other reasons, they...
A Picture of Prices and Markets
We can picture the circular flow of economic life in Figure 2-1 on page 29. The diagram provides an overview of how consumers and producers interact to determine prices and quantities for both inputs and outputs. Note the two different kinds of markets in the circular flow. At the top are the product markets, or the flow of outputs like pizza and shoes at the bottom are the markets for inputs or factors of production like land and labor. Further, see how de- Prices on factor markets wages,...
Questions For Discussion
1. The great English economist Alfred Marshall 18421924 invented many of the tools of modern economics, but he was most concerned with the application of these tools to the problems of society. In his inaugural lecture, Marshall wrote It will be my most cherished ambition to increase the numbers who Cambridge University sends out into the world with cool heads but warm hearts, willing to give some of their best powers to grappling with the social suffering around them resolved not to rest...
Scarcity And Efficiency The Twin Themes Of Economics
What is economics Over the last half-century, the study of economics has expanded to include a vast range of topics. What are the major definitions of these growing subjects 1 The important ones are that economics analyzes how a society's institutions and technology affect prices and the allocation of resources among different uses. explores the behavior of the financial markets, including interest rates and stock prices. examines the distribution of income and suggests ways that the poor can...