Week 6

market equilibrium

condition of price stability where the quantity demanded equals the quantity supplied

Keynesian economics and Markets

- He believed in markets but sometime governments had to step in to help and support markets - especially after the world wars - He wrote after the wars and great depression as he had to liv ein this economy and looked at mass unemployment

Keyne's Government Intervention

-the government can step in and hire people -They can put lots of money into giving people jobs and paying them therefore they would be buying more so the companies would be getting more money

Market equilibrium in more than one market

Lay off workers when they start losing money on products therefore demand goes down, people don't spend money cause they have no jobs but companies aren't making money so they lay more people off.

Keynes response to critics

Response 1 - there hasn't been a depression since the 1930s Response 2 - "Automatic stabilisers" 1. Money as unit of exchange vs. money as store of value - if money is a unit of exchange it is simple but if it's a store of value you can put the money away, you are making a contract with someone in the present to pay you in the future, if you buy today you are buying a bit of the future. 2. Why does this matter? - if an exchange isn't to your benefit you aren't going to make it 3. Why markets for assets (investments) work differently to markets for good - expectation that a firm will make money in the future 4. Why asset market is driven by irrational forces - Keynes "beauty contest" example - you win if you choose which one everyone will think is best

Keynes conclusion on markets

markets are complex when we consider the element of time

Market equilibrium in one market

the price changes so supply, and demand can balance

Criticism of Keynesian Economics

· Friedman says if you keep employing people by the government you will then encounter inflation · Open economy makes it difficult because money can be spent abroad in different countries - you need EU · In 70s oil prices increased majorly - economies completely dependent on oil · Had inflation and recession at the same time · Keynesian economies won't work if people know they are experiencing a Keynesian policy