Lecture 4 and 5

 

PERFECT MARKETS AND THE WORLD OF TRUTH

In his widely read guide to economics—The Undercover Economist—Tim Harford writes:

In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them the asking price. … The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off–and don’t harm anyone else.

The chapter of his book called “Perfect Markets and the ‘World of Truth'” is the starting point and the end point of the next block of lectures in our course Economics for Everyone. Harford is describing both the power of markets, and the potential for their failures, big and small.

He is describing what economics call the two fundamental theorems of welfare economics, and in order to do so he has to explore the determination of relative prices, the neoclassical theory of value.

In perfectly competitive markets we can describe the determination of prices in terms of demand and supply curves. And so we have to develop a facility in using these tools to understand how markets work, how they are sometimes manipulated for better or for worse, and how they may fail in a way that can rationalize a role for public policy.

Chapter 8 of the textbook has a particularly nice presentation of the issues and concepts we have as our learning objectives for these two lectures. In particular, watch this interview of a researcher who set out to explore the Fulton Fish Market in Manhattan to see how close it came to a perfectly competitive market.

Download the presentation for the next couple of lectures, and keep reading!