Week 4 - 23/9/2024
CHAPTER 7
Great economic problem = arrange scarce resources to satisfy as many needs
as possible
E.g. if supply of oil is reduced then oil will be used for more valuable uses.
The pricing system:
– Each user compares the value of a product in one use with the value in
alternative uses and they have an incentive to give up the use with the
least value for them (e.g. oil uses)
– A user compares the value of a product to its opportunity cost
Users of a product have more information about the value of that product in the
way they want to use it, than a central planner could have
Also solves the incentive problem (price of a product increases -> consumers
turn to substitutes)
The worldwide market has the ability to allocate resources without any central
planning or control
– Works without anyone’s understanding or knowledge
—> INVISIBLE HAND THEORY
In a free market -> no firm is so powerful that it doesn’t daily face the market
test
so in a successful economy there will be many unsuccessful firms
Speculation (special case of arbitrage) = attempt to profit from future price
changes
– Speculators buy and sell in special markets called future markets
– Futures = standardised contracts to buy or sell specified quantities
of a commodity or financial instrument at a specified price with
delivery set at a specified time in the future
Prediction market = a speculative market designed so that prices can be
interpreted as probabilities and used to make predictions
Markets are linked geographically, through time and across goods
CHAPTER 12
INVISIBLE HAND:
– Property 1: shows how self-interest works to minimise total costs
CHAPTER 7
Great economic problem = arrange scarce resources to satisfy as many needs
as possible
E.g. if supply of oil is reduced then oil will be used for more valuable uses.
The pricing system:
– Each user compares the value of a product in one use with the value in
alternative uses and they have an incentive to give up the use with the
least value for them (e.g. oil uses)
– A user compares the value of a product to its opportunity cost
Users of a product have more information about the value of that product in the
way they want to use it, than a central planner could have
Also solves the incentive problem (price of a product increases -> consumers
turn to substitutes)
The worldwide market has the ability to allocate resources without any central
planning or control
– Works without anyone’s understanding or knowledge
—> INVISIBLE HAND THEORY
In a free market -> no firm is so powerful that it doesn’t daily face the market
test
so in a successful economy there will be many unsuccessful firms
Speculation (special case of arbitrage) = attempt to profit from future price
changes
– Speculators buy and sell in special markets called future markets
– Futures = standardised contracts to buy or sell specified quantities
of a commodity or financial instrument at a specified price with
delivery set at a specified time in the future
Prediction market = a speculative market designed so that prices can be
interpreted as probabilities and used to make predictions
Markets are linked geographically, through time and across goods
CHAPTER 12
INVISIBLE HAND:
– Property 1: shows how self-interest works to minimise total costs
