Core Principles of Microeconomics and Market Systems

Economic Perspectives: Micro, Macro, Positive, Normative

Microeconomics examines the decision-making of specific economic units or institutions. In contrast, Macroeconomics looks at the economy as a whole or its major aggregates. Positive economic analysis deals with facts, while normative economics reflects value judgments.

Key Characteristics of the Market System

The market system is characterized by several key features:

• Private Ownership: Resources, including capital, are privately owned.
• Freedom of Choice: Individuals are free to engage in economic activities of their choice to advance their material well-being.
• Self-Interest: This is the driving force of such an economy.
• Competition: This functions as a regulatory or control mechanism.

In the market system, markets, prices, and profits organize and make effective the many millions of individual economic decisions that occur daily. Specialization, the use of advanced technology, and the extensive use of capital goods are common features of market systems. Functioning as a medium of exchange, money eliminates the problems of bartering and permits easy trade and greater specialization, both domestically and internationally.

The Function and Nature of Markets

Markets bring buyers and sellers together. Some markets are local, while others are international. Some have physical locations, while others are online. For simplicity, this chapter focuses on highly competitive markets in which large numbers of buyers and sellers come together to buy and sell standardized products. All such markets involve demand, supply, price, and quantity, with price being 'discovered' through the interacting decisions of buyers and sellers.

Understanding and Correcting Market Failures

A market failure occurs in a particular market when it produces an equilibrium level of output that either overallocates or underallocates resources to the product being traded. In competitive markets that feature many buyers and sellers, market failures can be divided into two types:

• Demand-side market failures occur when demand curves do not reflect a consumer's full willingness to pay.
• Supply-side market failures occur when supply curves do not reflect all production costs, including those that may be borne by third parties.

The government's legal right to use coercion and force can help to improve economic efficiency by correcting for market failures and by enforcing laws and regulations that reduce the risk that individuals and firms will be taken advantage of.