Microeconomics - Econlib - 0 views
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The motivating force for the change came from the macro side, with modern macroeconomics being far more explicit than old-fashioned monetary theory about fluctuations in income and employment (as well as the price level).
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Many different distortions can create similar anomalies. If cotton is subsidized, the price farmers get will exceed, by the amount of the subsidy, the value to consumers. Society thus stands to gain by eliminating the subsidy and moving to a price that is the same for both buyers and sellers.
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Public finance (see public choice) looks at how the government enters the scene. Traditionally, its focus was on taxes, which automatically introduce “wedges” (differences between the price the buyer pays and the price the seller receives) and cause inefficiency.
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It is hard to imagine a basic course in microeconomics failing to include numerous cases and examples drawn from all of the fields listed above. This is because microeconomics is so basic. It represents the trunk of the tree from which all the listed subfields have branche
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The specialization of production and the institutions of trade, commerce, and markets long antedated the science of economics. Indeed, one can fairly say that from the very outset the science of economics entailed the study of the market forms that arose quite naturally (and without any help from economists) out of human behavior
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In microeconomics this is translated into the notion of people maximizing their personal “utility,” or welfare.
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The economics of supply and demand has a sort of moral or normative overtone, at least when it comes to dealing with a wide range of market distortions. In an undistorted market, buyers pay the market price up to the point where they judge further units not to be worth that price, while competitive sellers supply added units as long as they can make money on each increment.
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The strength of microeconomics comes from the simplicity of its underlying structure and its close touch with the real world. In a nutshell, microeconomics has to do with supply and demand, and with the way they interact in various markets.
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If price controls keep bread (or anything else) artificially cheap, the predictable result is that less will be supplied than is demanded.
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Had the government given wheat farmers coupons, each of which permitted the farmer to market one bushel of wheat, wheat marketings could have been cut by the desired amount. Production inefficiencies could be avoided by allowing the farmers to buy and sell coupons among themselves.
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monopoly represents the artificial restriction of production by an entity having sufficient “market power” to do so.
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Modern monopolies are a bit less transparent, for two reasons. First, even though governments still grant monopolies, they usually grant them to the producers. Second, some monopolies just happen without government creating them, although these are usually short-lived.
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A final example of what occurs with official prices that are too high is the phenomenon of “rent seeking,” which occurs when someone enters a business to earn a profit that the government has tried to make unusually high.
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If the wage does not adjust downward to equate supply and demand, the rate of urban unemployment will rise until further migration is deterred. Still other examples are in banking and drugs.
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Rent seeking also occurs when something of value (like import licenses or radio/TV franchises) is being given away or sold below its true value
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The great unifying principles of microeconomics are, ever and always, supply and demand. The normative overtone of microeconomics comes from the fact that competitive supply price represents value as seen by suppliers, and competitive demand price represents value as seen by demanders.