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Chapter 2: Markets and government in a modern economy 1. What is market and what is the invisible hand 2. how market solve the basic economic problems 3. the economic role of government 4. Different terms 5. trade, Money and Capital. 1

Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

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Page 1: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Chapter 2: Markets and government in a modern economy

1. What is market and what is the invisible hand2. how market solve the basic economic problems3. the economic role of government4. Different terms5. trade, Money and Capital.

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Page 2: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Learning Objectives

1. Describe what is meant by the market and describe the process of achieving equilibrium in a market economy.

2. Use your definition of market equilibrium to address three basic economic problems that confront all societies.

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Page 3: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Objectives3. Explain how the price system works as an invisible

hand, allocating goods and services in a market economy.

4. Use a circular-flow diagram to illustrate the relationships between agents and markets in a modern economy.

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Page 4: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Objectives

5. Make a case for government intervention in a mixed market economy in order to promote efficiency, equity, and macroeconomic growth and stability.

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Page 5: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Market definition

A market is the institution through which buyers and sellers interact and engage in exchange.

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Page 6: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

A. What Is a Market?

• There is no higher authority that directs the behavior of these economic agents; rather, it is the invisible hand of the marketplace that allocates final goods and services, as well as factors of production.

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Page 7: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Markets

• Buyers and sellers receive signals from one another in the form of prices. If buyers want to buy more of a good, prices rise and sellers respond by supplying more to the marketplace.

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Page 8: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Markets

• If buyers want to buy less of a good, prices fall and sellers respond by supplying less to the marketplace.

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Page 9: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Markets

• Market equilibrium occurs when the price is such that the quantity that buyers are interested in purchasing is equal to the quantity that sellers are interested in supplying to the market.

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Page 10: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Markets

• The market mechanism allows an economy to solve the three economic problems of what, how, and for whom.

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Page 11: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Economic problem

• The economic problem: Given scarce resources, how, exactly, do large, complex societies go about answering the three basic economic questions?

• To answer the three basic questions we need to study the economic systems.

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Page 12: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Economic Systems

• Economic systems are the basic arrangements made by societies to solve the economic problem.

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Page 13: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Systems

They includes four systems:1. Islamic economy2. Laissez-faire economies3. Command economies4. Mixed systems

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Page 14: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Islamic Economy

• Some people think that Islam has no economic system of its own

• Islamic Economics is as Old as Islam Itself

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Page 15: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Islamic Economy

• Islamic economics is accordance with Islamic law.

• Islamic economics can refer to the application of Islamic law to economic activity either where Islamic rule is in force or where it is not;

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Page 16: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Definition of Islamic economics

• The Islamic economics is both a science and an art which deals with the daily routine of a Muslim's economic life.

• i.e. how he earns his income and how he spends it. It is a science in the sense that it involves many scientific methods in the production of material goods, their distribution and consumption.

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Page 17: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Principles

• The Islamic economic system is directly guided by Allah Almighty Himself.

• all important aspects of the Islamic economic system and the applicable norms are thoroughly discussed in the Holy Quran

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Page 18: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Cont.

• Allah created all needed provisions so that they may consume them and may satisfy their wants

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Page 19: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

تعالى • الله إلى وترجع مملوكة الثروة كلالثروة • على واألمناء الحراس هم المسلمون

والمالممنوع • الثروات اكتنازواجب • الثروة هذه وتدوير تعميم

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Page 20: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Other principles

1. All wealth belongs to Allah (SWT(2. The Muslims are the custodians and trustees of the

wealth.3. Hoarding the wealth is forbidden.4. Circulating the wealth is obligatory

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Page 21: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

The free market system

• In a laissez-faire economy, individuals and firms pursue their own self-interests without any central direction or regulation.

• The central institution of a laissez-faire economy is the free-market system.

• A market is the institution through which buyers and sellers interact and engage in exchange.

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Page 22: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Consumer sovereignty ( المستهلك ( سيادة

• Consumer sovereignty is the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

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Page 23: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Free enterprise

• Free enterprise: under a free market system, individual producers must figure out how to plan, organize, and coordinate the production of products and services.

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Page 24: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

distribution of output

• In a laissez-faire economy, the distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth.

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Page 25: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Free System

• The basic coordinating mechanism in a free market system is price. Price is the amount that a product sells for per unit. It reflects what society is willing to pay.

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Page 26: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Command economies

• In a command economy, a central government either directly or indirectly sets output targets, incomes, and prices.

• And the government determine what to produce and how much and How and for Whom to produce.

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Page 27: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Mixed Systems, Markets, and Governments

Since markets are not perfect, governments intervene and often play a major role in the economy. Some of the goals of government are to:

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Page 28: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

goals of government in mixed economy

• Minimize market inefficiencies• Provide public goods• Redistribute income• Stabilize the macro economy:

– Promote low levels of unemployment– Promote low levels of inflation

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Page 29: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

The Market System Relies on Supply and Demand to Solve the Trio of Economic Problems

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Page 30: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

The Basic Decision-Making Units

Firms and Households and An entrepreneur

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Page 31: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

A firm

• A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

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Page 32: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

An entrepreneur

• An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

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Page 33: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Households

• Households are the consuming units in an economy

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Page 34: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Input Markets and Output Markets: The Circular Flow

• The circular flow of economic activity shows how firms and households interact in input and output markets.

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Page 35: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

B. Trade, Money, and Capital

• Advanced economies use complex systems of trade in order to accumulate the bundle of goods and services that the people in that economy want to consume.

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Page 36: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Cont.

• People produce the goods and services that they can produce most efficiently, and then they trade their excess for other items that they need.

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Page 37: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Money

• Money is not an input or factor of production. Consumers and firms use money in order to more efficiently carry out market transactions; it is a kind of lubricating oil ( التشحيم (زيتthat allows the machinery of an economy to operate with a minimum of friction (احتكاك).

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Page 38: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Capital

• In this course, the term capital does not refer to money. Instead, the term refers to productive inputs.

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Page 39: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Cont.

• capital includes durable items like factory buildings, machine tools, electric drills, jack hammers, and so on.

• It also includes stocks of semi finished goods. These are goods which are on the way to becoming consumer goods but which are still manufactured inputs to be used in later stages of the production process.

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Page 40: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Capital accumulation ( المال راس (تراكم

• Capital accumulation is an important determinant of economic growth. An economic system that builds a strong capital base is investing in a factor of production that will make all other factors more productive or useful.

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Page 41: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

The Economic Role of Government

• In the real world, markets do not always operate as smoothly as we might like. Market imperfections (نقائص) lead to a wide range of problems, and governments step in to address them.

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Page 42: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Gov. intervention

• Governments intervene in a market economy in order to promote efficiency.

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Page 43: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Role of Government

• Governments intervene in a market economy in order to promote equity, or fairness, in the distribution of resources and income.

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Page 44: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Cont.

• This is a difficult concept because there is no universal definition of fairness. Markets distribute goods and services to those who have the money to purchase them, not necessarily to those who need or deserve them the most.

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Page 45: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Role of Government

• Governments intervene in a market economy in order to promote macroeconomic growth and stability using monetary and fiscal policy.

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Page 46: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Fiscal policies

• Fiscal policies of government (the power to tax and spend) that try to affect the economic stability

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Page 47: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

Monetary policy

Includes: • interest rate policies• Money creation and issuing• So It is (the power to adjust the money

supply and interest rates)

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Page 48: Chapter 2: Markets and government in a modern economy 1.What is market and what is the invisible hand 2.how market solve the basic economic problems 3.the

The effect of M. & F. policy

• M. & F. policy help to move an economy along a stable path, avoiding periods of excessive inflation and unemployment.

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