10/14/2011 Class18

Paradox: Marxism
Suppose a worker produces $25 per hour
The worker's wage should be close to how much he produces because if the wage is high, he is not worth it, if the wage is too low, another employer will have a profit opportunity to hire this worker.
Marx thinks that workers don't get paid equally to how much they produce
Irony: The whole entire bases of Marxism is based upon: It proposes the complete abolition of private property.

Problems of markets: they often cannot work well.
(1)Lack of existence (market itself cannot exist or something prevents market from working well)
Implication:
<1> There's a situation that prevents commercial transaction from happening.
<2> Government control: consumers and producers don't have options (Lack of competition)
<3> We don't have perfect information (If one group in a transaction has more information about that transaction, them the market won't work)
Application: Insurance company. Healthy people may think the current cost to get an insurance is so high that they drop while the sick may attend, then the insurance company raise the cost to attend. In the end, the demand decreases because of the rise of price and healthy people are more unwilling to buy the insurance.
Can government fix it? NO. There's an opportunity for someone else to make a profit and government can also face a failure.

Goal of economy: outcome of market is efficient, delivering what people want at lowest possible cost.
(2)Institution: All the formal and informal mechanisms that people stumble upon to live a better life.
Implication:
<1>Institution protects the private property
<2>Good government The rule of law: everybody is treated equally;the law can't be arbitrary;laws should be general and predictable
<3>Different institutions can lead to different economics situation among identical countries.
<4>Some cultural norms may impede economic growth.

Inflation: the general increase in all prices in an economy
Cause of inflation: too much money floating in the market
MONEY IS NEUTRAL

Ethics
People think it morally inferior to pursue self-interest in transaction.
Golden rule: better morally if people produce to satisfy the needs of others first rather than produce to enrich themselves.