[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

The primary reliance on private decision making in the United States reflects
economists’ beliefs that this reliance is appropriate and necessary for economic
efficiency. However, economists also believe that certain interventions by government
are desirable. Like the appropriate balance between public and private sectors,
the appropriate balance between concerns about equality (often referred to
as equity concerns) and efficiency is a central issue of modern economies. As
elsewhere, trade-offs must be made.
Wrap-Up
FIVE CORE IDEAS
1. Trade-offs: resources are scarce, so trade-offs are a basic fact of life.
2. Incentives: in making choices, decision makers respond to incentives.
3. Exchange: people benefit from voluntary exchange, and in market economies,
market exchanges lead to the efficient use of resources.
4. Information: the structure that markets take and how well they can function
depend critically on the information available to decision makers.
5. Distribution: markets determine how the goods and services produced by the
economy are allocated to members of society.
The Three Major Markets
The market economy revolves around exchange between individuals
(or households) who buy goods and services from firms, and
firms, which take inputs, the various materials of production, and
produce outputs, the goods and services that they sell. In thinking
about a market economy, economists focus their attention on three
broad categories of markets in which individuals and firms interact.
The markets in which firms sell their outputs to households are
referred to collectively as the product market. Many firms also
sell goods to other firms; the output of the first firm becomes the
input of the second. These transactions too are said to occur in the
product market.
On the input side, firms need (besides the materials they buy in
the product market) some combination of labor and machinery to
produce their output. They purchase the services of workers in the
labor market. They raise funds to buy inputs in the capital market.
Traditionally, economists also have highlighted the importance of
a third input, land, but in modern industrial economies land is of
secondary importance. For most purposes, it suffices to focus
attention on the three major markets—product, labor, and capital—
and this text will follow that pattern.
Firms
Sell
goods
Hire
labor
Invest
in capital
goods
Figure 1.1
THE THREE MARKETS
Product
market
Labor
market
Capital
market
Households
Buy
goods
Sell
labor
Borrow
and invest
money
To economists, people wear different hats. They are usually
consumers in the product market, workers in the labor
market, and borrowers or lenders in the capital market.
THE THREE MAJOR MARKETS ∂ 15