“Economic organizations are created-entities within and through which people interact to reach their goals”
(Milgrom & Roberts)
- Tools to reach some goals
- Than have to be judge in the capability to reach these goals
- Economic goals: satisfaction of economic needs as consumpètion of goods and services
- Humans have to know what they like most/ prefer the least, as they are tools to reach goals
- We live in a world of scarcity:
- Within individual level of scarcity: given the income and welf of an person that want to consume more of a good have to give up the opportunity to consume smth else.
- In between individual level of scarcity: the increasing level of utility/ level of satisfaction of a person would increaseat expense of another one.
ECONOMY: highest-level organization as a whole
MARKETS (and the way transaction are governed, managed and carried out): are lower-level economic organizations
- It’s an economic organization.
ECONOMIC SYSTEM: is the collection of different markets.
- Can be seen as an economic organization divided in different layers (national, regional, local, …)
FIRMS: are economic organization formed and interacting with individuals in market and with themselves.
As society, what is the best allocation of resources and goods given the infinite spectrum of possibilities available?
Pareto Efficiency Criterion:
-> RULE: An allocation of resources A is inefficient if there is some other available allocation B that everyone concerned likes at least as A and that one person strictly prefers.
-> In such a case A is Pareto dominated by B (B is Pareto superior to A) and it is clearly wasteful from a society point of view. A is said to be Pareto efficient (or Pareto optimal).
- Famous italian economy, 19-20° sec.
-> CONSIDERATIONs:
- Etichs & Social justice is not discriminated: giving all resources ot one individual does not allow us to discriminate whether one scenario is better than the other.
- There is not only one pareto efficient solution: there could be multiple pareto efficient allocation of resources.
-> Its predictive power is not totally absent: in the end we should arrive to a pareto efficient solution
-> IMMIGRATION:
- Case 1: A -> B: any blocking force: the endogeneous force within the system would lead the migration
- Case 3: A->B: the last person is a contrasting force => State Intation is the force that lead from A to B.
The Efficiency Principle:
-> DEF: If people are able to bargain together effectively and can effectively implement and enforce their decisions, then the outcomes of economic activity will tend to be efficient (at least for the parties to the bargain).
- Indeed, since efficient choices and allocations are less vulnerable, we should expect inefficient arrangements being supplanted over time, while efficient ones survive.
=> In the long run inefficient allocation will be left!
The Edgeworth Box:
-> Tools that highlight in a structured way the benefit of trading and has a positive side effect.
-> Given:
- Two consumers A & B,
-> Box dimensoins (height, width) are the quantities available of goods.
- The box includes all feasible allocation of goods
-> PREFERENCES:
- MONOTONIC: the more good u consume, the higher is the level of utility.
-> No satiety point.
- CONVEX: each idividual prefer to consume a balanced mix of goods instead an higher ammount of a goods.
-> Combining these rules we can identify an endowment allocation:
-> CORE : set of all Pareto-Optimal allocations that are welfare-imrpoving for both consumers relative to their own endowments.
-> Rational Trade should achieve a core allocation.
The two fundamental theorems of Welfare Economics:
CONTACT CURVE: set of all Pareto-optimal (or efficient) allocation:
- Competitive markets yeld Pareto efficient outcomes.
-> To reach a pareto efficient solution is to give an endowment allocation and make people trade as much as possible:
CE -> PE
- The social welfare can be maximized at an equilibrium with a suitable level of redistribution.
-> If u want a specific pareto efficient as solution => is needed to find an appropriate endowment allocation and make people trade as much as possible:
PE -> CE
Trade & Specialization:
-> May lead to a greater amount of goods and resources to be traded.
TRADE:
- Enables economic agents to reach pareto efficient allocation given the amount of resources & good available;
- Increase the system’s goods & resources to be traded.
SPECIALIZATION:
- May 🔺 amount of good & resources available in an economic system
- 🔺 productivity.
Theory of Comparative Advantage:
-> DEF: comparative advantage is the economy’s ability to produce a particular good or service at a lower opportunity cost tan its trading partners.
-> THEORY: the theory ntroduces opportunity cost as a factor for analysis in choosing between different options for production
-> OPPORTUNITY COST: value of the next-highest-valued alternative use of that resource.
- Value that one can obtain from using that resource in the best atlernative way with respect to what it is actually doing.
Specialization & Trade:
| -> TRADE: | -> SPECIALIZATION: |
| ✔ Useful for welfare ❌Need coordination | ✔Increase the productivity ❌Requires coordination |
-> Efforts are wasted if:
- Firms are not sure if the others are doing their part
- They’ll buy in the market what is necessary for their needs
-> Solutions to gain informations:
- Centralized planning
- Markets enable autonomous decentralized decisions
| Centralized Planning: | Markets decentralized decisions: |
| -> DEF: A social planner collect all the needed information of resources availability and inputs and preference of people. Used by socialist economies Ex: set of 5 years production plan where everyone has specified activity. | -> DEF: based on free initiative of individuals Represented by the capitalistic view -> CHAR: The scarcity of a good define the price => Market through the price is capable of highligh scarcity Markets are costless mechanism to achieve efficient allocation |
⚠Prices are truly informative only if markets are prefectly competitive⚠
-> The markets imperfections are:
| Market power Externalities | Transaction Costs Asymmetric Information |
=> Markets are costless mechanisms to achieve efficient allocations because PRICEs act as “information vehicles” by signaling scaricty.
*But this is 100% valid only if MARKETS ARE PERFECTLY COMPETITIVE: only in this case prices signal the true benefits and costs for the use of resources by the economic system.
