ECN 203 Chapter Notes - Chapter 3: Excess Supply, Invisible Hand, Competitive Equilibrium
Sarina Wallace 9.27.2015
SUPA Economics Period 6
Chapter 3.0 INTERDEPENDENT CHOICE AND MARKET
COORDINATION Outline
3.1 FACTORS THAT GIVE RISE TO COMPLEXITY, INCLUDING THE DIVISION OF
LABOR AND THE GAINS FROM TRADE
3.1.1 The Division of Labor— Benefits and Costs
●According to Smith are interdependent by our very nature
●Interdependence is natural and inevitable
○Due to the fact that there is many people but finite resources
○Either through conflict or cooperation, makes us interdependent
●Specialization: individuals dividing up the labor across trades as well as within trades
○Increase productivity
●Costs a person's mind could lose their mental exertion and become ignorant and stupid
●However education could solve it
3.1.2 The Division of Labor— Reasons for Its Productivity
●Reasons for the increased productivity from the division of labor
○Increase of dexterity in every particular workmen “practice makes perfect”
○Saves time
○The more time spent on activity increases knowledge and it inventiveness
●If there is no division of labor one would have to produce everything you need or want
for yourself
●Three roles in society: Shelter – builders, Food-gatherers, and clothes – makers
3.1.3 Surpluses, Exchange, and Gains from Trade
●Dividing up the labor we are more productive
●Surplus: more of a commodity then one desires.
●Must have a mechanism to coordinate the exchange of the surpluses
●Gains from trade: the increased utility made possible by special litigation(Through the
division of labor) and trade (exchange surpluses)With the division of labor, individual
generates a surplus of that which she specialized in producing. Then by exchanging a
portion of her surplus for portions of those surpluses of other items held by other
producers she can enjoy the full range of she desires.
3.1.4 Absolute Advantage and Gains from Trade
find more resources at oneclass.com
find more resources at oneclass.com
●Absolute advantage: the ability to produce more of a good than the person or country one
trades with using the same amount of resources
●Trade can benefit both
●As long as trade benefits both people they will continue to participate in the division of
labor in exchange of surpluses
3.1.5 Comparative Advantage and Gains from Trade
●In exchange of surpluses can be mutually beneficial even if one of the parties absolutely
better doing everything
●Comparative advantage: the ability to produce at a lower opportunity cost and the person
or country one trace with. As long as the comparative advantages exist, Trade is
beneficial
3.1.6 Division of Labor Is Limited by the Extent of the Market
●Extent of the market: limitation on the division of labor
○For example it is pointless and specialized if there's not enough of a demand to
warrant the specialty
●Division of labor is limited by the extent of the market that there is a social benefit to
developing infrastructure that extends the market
●Extending the market enables a finer division of labor and in turn increases the
productivity of society
●Examples of community infrastructures: Roads ports and bridges
3.1.7 Tradition as a Mechanism for Exchanging Surpluses
●Form of coordination is based on condition
●Traditional system: a cordless system(mechanism for exchanging surpluses) in which the
patterns of the division of labor are based on social definition of place(E. G., Gender) and
these patterns are passed down from generation to generation
●Traditional systems tend to be internally stable (patterns of behavior very predictable)
due to interdependent decisions I'm based on predictable
○Due to its rigid structure
●Traditional systems are externally unstable (Tend to break down quickly when exposed to
other system)
3.1.8 Command as a Mechanism for Exchanging Surpluses
●Command economy: a quarter a system(mechanism for exchanging surpluses) and which
is central authority determines how resources are allocated, what is produced, who gets
what and how much of that production, and what investments are made.
find more resources at oneclass.com
find more resources at oneclass.com
●Since decisions are made by a single person(or small group of people), they're well
coordinated what's since one person(Or small group) cannot know the desires of all
others or matching the creative ways to use resources to produce, the decisions are not
efficient (they don't enable the attainment of the most utility from the available
endowment)
●Quality of the production system in a command economy is also limited by the
knowledge and creativity of those in command
●Command economy may be internally consistent but produce inefficient results
3.1.9 The Liberal System of Free Markets as a Mechanism for Exchanging Surpluses
●Liberal system of free markets: acorn a system (a mechanism for exchanging surpluses)
in which each individual get to share the social and dominant as her private property with
which she can do as she pleases, and in which she can freely exchange with whom she
pleases when and where she pleases.
●When the system is functioning ideally, Participating in the market system allows her to
get the most utility for my share of the endowment while the same time it how's the
unintended consequence that she is forced to serve the preferences of others
●The agility of the market system allows it to respond creatively to changing conditions
any ball and constructive ways
●Liberal: “free”
●Free markets are a moral
○Focus on efficiency but not fairness
3.1.10 The Liberal System of Free Markets and Justice
●Commutative justice: the fairness of the rules by which the “market game” is played
●A perfectly functioning free market system does not create community justice, it requires
it.
●Adam Smith- “justice… is the main pillar that uphold the whole edifice [of society]
●The long term sustainability of a liberal free market society depends on the constructive
participation of the citizens
●Is the rules of fair play are not clear and calmly shared by all citizens, and/or if a lot of
people choose to not play by those rules and/or this isn't feel that the system is unjust this
sustainability will not last long
●Sustainability relies on the justice of that system
3.1.11 On Markets and the Dimensions of Justice: Distributive and Commutative Justice
●Communicative justice: Defining in enforcing our common rights and responsibilities as
citizens in a liberal society so that the conditions in the race for wealth and the condition
surrounding that race are fair
●Distributive justice: the fairness of the outcome (who gets what and how much) in the
market process
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
3. 1 factors that give rise to complexity, including the division of. 3. 1. 1 the division of labor benefits and costs. According to smith are interdependent by our very nature. Due to the fact that there is many people but finite resources. Either through conflict or cooperation, makes us interdependent. Specialization: individuals dividing up the labor across trades as well as within trades. Costs a person"s mind could lose their mental exertion and become ignorant and stupid. 3. 1. 2 the division of labor reasons for its productivity. Reasons for the increased productivity from the division of labor. Increase of dexterity in every particular workmen practice makes perfect . The more time spent on activity increases knowledge and it inventiveness. If there is no division of labor one would have to produce everything you need or want for yourself. Three roles in society: shelter builders, food-gatherers, and clothes makers. Dividing up the labor we are more productive.
