The following questions are intended to confirm understanding of the topics of the book. The references are to articles cited in the literature survey at the end of the corresponding chapter.

Markets and Governments

The prima facie case for the market

1. Adam Smith took human nature to be self-serving but based the case for the market on ethical behavior: How was the conjunction between self-serving and ethical behavior achieved? Why is this conjunction regarded as an important contribution to moral philosophy and economics? Is the case for the market based on consistency between self-interested and ethical behavior distinct from the case for the market based on personal freedom? Adam Smith reached his conclusion unaided by a conception of a market that has supply and demand functions: Can you trace through his logical train of thought that without supply and demand functions resulted in the metaphor of the invisible hand? Although Adam Smith was not the originator of the idea of a market characterized by supply and demand, he is nonetheless regarded as the father of modern economics: Do you agree that this acclamation is justified?

2. Although our description of the three required conditions for efficiency of a competitive market is sequential (we describe one condition at a time), the conditions are achieved simultaneously in markets. Why is there simultaneity in the achievement of the conditions?

3. Explain the competitive-adjustment mechanism. How can the metaphor of the invisible hand be extended to the outcomes achieved through the competitive-adjustment mechanism when there are stable and unstable market equilibria?

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