The new forums will be named Coin Return (based on the most recent vote)! You can check on the status and timeline of the transition to the new forums here.
The Guiding Principles and New Rules document is now in effect.
macroeconomics introduction
mooshoepork
Registered User regular
Registered User regular
Hey all. I thought someone here would be able to help me with a couple of questions I have, as I have just started this subject at university. I have no prior knowledge on the matter, and a few of these questions are really frustrating me.
1. Water is necessary for life. Is the marginal benefit of a glass of water large or small?
Now, I would say Large, but the question seems like it is worded strangely. Marginal relates to small right? So is the small benefit of a glass of water large or small? This just seems strange to me, like the term "marginal benefit" doesn't fit. I'd say Large though, as the benefit of having water means life.
2. THIS one has pissed me off: "what does the invisible hand of the marketplace do?"
This is the text out of the book:
Prices reflect both the value of a good to society and the cost to society of making the good. Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social benefits and costs of their actions. As a result, prices guide these individual decision makers to reach outcomes that, in many cases maximize the welfare of society as a whole.
Now. THIS. Makes absolutely no sense to me at all. This whole theory of the "invisible hand" seems ridiculous. Can anyone here make sense of this? I am not coming to get you to do my homework, I just really need some clarification on these two questions. I'm tearing my hair out here and it's only first week
edit: Just had a brainstorm. Not sure if I am on track here on not but say for number 2: The society doesn't produce much of a certain product, such as apples, and people buy them, because they WANT them, they are unknowingly, benefiting the society, as they are purchasing goods and keeping the society productive? argh I dunno.
edit2: Or, prices/worth of goods and services to a society, drive buyers to buy said goods and services. And by buying these at a perceived cost, it is beneficial to the society?
1. Water is necessary for life. Is the marginal benefit of a glass of water large or small?
Now, I would say Large, but the question seems like it is worded strangely. Marginal relates to small right? So is the small benefit of a glass of water large or small? This just seems strange to me, like the term "marginal benefit" doesn't fit. I'd say Large though, as the benefit of having water means life.
2. THIS one has pissed me off: "what does the invisible hand of the marketplace do?"
This is the text out of the book:
Prices reflect both the value of a good to society and the cost to society of making the good. Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social benefits and costs of their actions. As a result, prices guide these individual decision makers to reach outcomes that, in many cases maximize the welfare of society as a whole.
Now. THIS. Makes absolutely no sense to me at all. This whole theory of the "invisible hand" seems ridiculous. Can anyone here make sense of this? I am not coming to get you to do my homework, I just really need some clarification on these two questions. I'm tearing my hair out here and it's only first week
edit: Just had a brainstorm. Not sure if I am on track here on not but say for number 2: The society doesn't produce much of a certain product, such as apples, and people buy them, because they WANT them, they are unknowingly, benefiting the society, as they are purchasing goods and keeping the society productive? argh I dunno.
edit2: Or, prices/worth of goods and services to a society, drive buyers to buy said goods and services. And by buying these at a perceived cost, it is beneficial to the society?
mooshoepork on
0
Posts
invisible hand sounds like it's based more in supply and demand than anything else to me... demand for a product creates a worth for it and its properties. Therefore what we want must be good for us, right? Which is of course a fallacy (I mean, we love grease and sugar and salt, but the amount at which we consume it isn't good for us, doesn't "maximize the welfare of society as whole" but that's sort of an aside)
This seems like a sort of strange question to me without more detail or perhaps that's the trick to it. The marginal benefit of a glass of water would depend on how much water you have to begin with. If water is scarce to the point that people are dying then the marginal benefit of a single glass of water should be larger than if water was scarce but present in sufficient quantity to support society. If water is abundant and people all have more water than they could ever use then the marginal benefit of a single glass of water is nearly zero.
This has to do with the concept of diminishing marginal benefit which is something you might look up to help you understand this question.
I should probably add though I've only just finished taking first year micro and am midway through my first term of macro so while I'm fairly confident in my answer you should certainly double check with your text.
The term "invisible hand" was used by Adam Smith, and like mooshoepork says, is a metaphor for the market adjusting to the price where supply equals demand. Not coincidentally when supply equals demand the "social benefit" is maximized, in general at least.
You can see this by looking at the margins (economics is almost always about looking at the margins). If one more of a good were produced, it would be wasted at the same price, and if one less were produced someone would have bought it. You could also look at if demand at a given price increased/decreased by one unit while keeping the price constant.
So, in a market economy, where everyone is selling, say apples, everyone is selling them at a price that people will buy them at, due competition from other apple sellers. So, if there aren't many apples, prices will rise, due to the invisible hand adjusting the price because of demand. But, if there were more apples than needed, the price would be adjusted because there is more supply, than demand.
I think I understand if ^ is correct.
Kind of this thing here. The marginal benefit of the glass of water depends on who is drinking it. The marginal benefit to me if I've been drinking water all day would be very little. The marginal benefit of a glass of water to someone dying of thirst, however, is very very high. And that's how you should answer this question, often questions in economics will have answers such as "one the one hand ... , on the other hand ..."
I'd go further with the invisible hand thing. Adam Smith is the best to read to sum this up, basically the self-interest of everyone leads to benefits for all, not necessarily just selfishness. There is a demand for pork, right? But I don't want to keep a pig in my backyard to slaughter everytime I want some meat. I go to a butcher. Now, this butcher, he doesn't sell pig meat because he's concerned for my welfare, and whether or not I can have a tasty dinner tonight. He sells pig meat because he wants to make money so he can buy other stuff. We're both only concerned with our self-interest, but through the invisible hand of the market there will be a variety of goods and services for us all to enjoy (demand) by virtue of our specialisations.
I think that stuff on prices probably eliminates too much of the 'invisible hand' thing as I know it. But it's your textbook, so it's likely the answers to your questions are in there somewhere.
http://newnations.bandcamp.com
"Invisible hand" organisation really isn't hard to grasp, and is visible most everywhere. Basic principle is that the spontaneous organisation created by many people acting invididually is generally more efficient than having one person making centralised organisation decisions; in essence, two million heads are better than one.
Soviet vs US supermarkets example
In Soviet markets, decisions were centralised. One person decided that X cans of beans and Y bottles of vodka would be produced that year, thus on the shelves in markets available to buy there were X cans of beans and Y bottles of vodka. Production did not respond to demand, but to central control. No matter how popular vodka or beans were to buyers, there would be no more once the annual amount had been bought. What if everyone was bean-intolerant and there was a gin famine and consumption of vodka rocketed? There would simply be lots of cans of beans left on the shelves, and vodka would disappear quickly. Generally, prices were similarly centralised, and would only be adjusted infrequently because it had to be done by one person.
In US supermarkets, decisions were market based. Production had no central control, but was run by multiple companies making multiple products, or many versions of the same product. If nobody bought beans because they were all bean-intolerant, then the company(ies) making beans would lose money and there would be less or no beans on the shelves. If vodka consumption soared, then those companies would make money, and invest it back into making more vodka to meet the high demand. The level of production is dictated by the demand for the product, and is thus more efficient. Also, decisions are constantly being made and adjusted within the market in accordance with the amount that people are buying. Prices are flexible; so if people are buying large quantities of vodka, there will be less vodka for sale, but still large demand, and therefore it is more valuable - the price will go up. This higher price will lower the demand (some people can no longer afford vodka) and therefore ensure that you do not totally run out of vodka.
Supermarket queues self-interest example
My local Sainsbury's has 10 checkout tills. If everyone stood at one till and left the other nine free, it would take us a long time to checkout, and be very inefficient. Instead, when people see open tills, they move to one, balancing the workload. Individually, I don't move to an open till because I am trying to help Sainsbury's work more efficiently, or because I particularly care about the people in line after me - I move to the open till because it will be quicker for me. Everyone is working in their own self-interest, but it is benefiting the group as a whole; everyone knows that when a new till opens, everyone from the existing tills rushing towards the new one will simply create a log-jam. Therefore some people risk the new till, and some people bet on staying in line - but no matter whether they each individually cut the time they spend in line (some won't make it to the new till, some of the existing lines will remain long) they are making the group average time to checkout faster, and balancing out the lines. Few people remain in a long line when there is a short one available.
Try imagining how that would work if you had a Sainsbury's employer telling you which line to go into? Instead of 100 people watching the lines and acting quickly on their own judgement, you have one person watching lines and trying to calculate what to do with 100 people. It will inevitably take longer - even if he is a genius at working out optimal solutions, it will take him longer to communicate where to go to people than it would for them to see the shortest route and move there themselves.
You can observe this whenever you go to a supermarket - you will very rarely see a great disparity in the speed and length of checkout lines. People are very aware and each individually judging the speed of each line; whether the checkout seller is slow, whether one person in line has a large basket, or is old & using vouchers which take longer, etc.
1. Water is necessary for life. Is the marginal benefit of a glass of water large or small?
Depends on your situation, if you are on the verge of dying in a desert from dehydration, it would be quite large. If your in the middle of a rain storm, quite small.
2. THIS one has pissed me off: "what does the invisible hand of the marketplace do?"
Refers to laissez faire (sp?) economics. Idea that market will naturally balance itself out to a point where demand = supply. (You can actually look up this term in wikipedia for more information)
Anyways, yes, the price will fluctuate with supply and demand until you reach equilibrium between the two (which is more of a myth than anything, because prices will never stay fixed unless controlled by an outside force [see above Soviet explanation]). I'm assuming you're looking at the Classical model right now, which is much more convoluted than the Keynesian model, which I'm sure you'll be studying next.
As far as the family owning the car thing, it has to do with utility and the costs associated with ownership. It's a sliding scale.
Basically, it's all very vague at the moment. Welcome to Economics!