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Economics U$A: 21st Century Edition

Economic Efficiency (Microeconomics)

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In preparation for WWII, the Roosevelt administration instituted wage price and price controls to curb inflation and better focus production on war materials. When the Nixon administration set up price controls for beef, farmers attempted to stifle the supply by withholding animals from the markets. Following WWII, rent controls established to aid returning war veterans cut into landlord profits and consequently led some to abandon properties. These stories examine how the “invisible hand” behind free markets operates, the reasons for interfering with free markets, and the costs of doing so.

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Unit Overview

Purpose:

To help viewers understand the forces that affect prices, the way prices act as signals to consumers and producers, the cost of interfering with free-market prices, and the circumstances that justify interference with the free market.

Objectives:

  1. People are motivated to buy and sell goods and labor services by their desire to improve their well-being.
    • Consumers purchase products and services to maximize their well-being.
    • Producers supply these products and services in a manner that maximizes their profits.
  2. Prices are the mechanism that provides information and incentives to buyers and sellers.
    • Prices tell producers how much they can produce at what profit.
    • Prices indicate to consumers how much and what they can buy with their income.
    • The market balance occurs at a price where the separately formed plans of buyers and sellers mesh so that the quantity demanded (at a particular price) and the quantity supplied (at that price) are the same.
    • This equilibrium point encourages the efficient allocation of resources.
  3. Interference with the natural market forces through the imposition of price controls, rationing, quotas, etc., can lead to an inefficient allocation of resources.
  4. There are circumstances in which market intervention may be justifiable:
    • Markets may exhibit unstable price behavior.
    • Market forces may hurt the economically disadvantaged.
    • Markets may not respond quickly enough during national emergencies.

Meet the Series Experts

John Kenneth Galbraith

Economist known as the leading proponent of 20th-century political liberalism, and a prolific author who produced four dozen books and more than a thousand articles, including the popular trilogy American Capitalism, The Affluent Society, and The New Industrial State. He taught at Harvard University for many years, taking leaves to serve in the presidential administrations of Franklin D. Roosevelt, Harry S. Truman, John F. Kennedy, and Lyndon B. Johnson. He also served as United States Ambassador to India under President Kennedy. Due to his prodigious literary output, he was arguably the best-known economist in the world during his lifetime and one of a select few people to be twice awarded the Presidential Medal of Freedom. Dr. Galbraith received his B.A. from the University of Toronto and M.A. and Ph.D. in Agricultural Economics from the University of California, Berkeley.

Herbert Stein

Senior fellow at the American Enterprise Institute and Chairman of the Council of Economic Advisers under presidents Richard Nixon and Gerald Ford. From 1974 to 1984, he was the A. Willis Robertson Professor of Economics at the University of Virginia, where he formulated “Herbert Stein’s Law”; this stated, “If something cannot go on forever, it will stop,” meaning that if a trend cannot go on forever, there is no need for action or a program to make it stop; it will stop of its own accord. This notion gave him the reputation of being a pragmatic conservative, jokingly referred to as a “liberal’s conservative and a conservative’s liberal.” He was the author of The Fiscal Revolution in America and was on the board of contributors of the Wall Street Journal. Dr. Stein received his B.A. from Williams College and Ph.D. in Economics from the University of Chicago.

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Take the Economics USA: Economic Efficiency Quiz.

Quiz Addendum

5. Answer explanation:
The price support programs helped farmers in the short run by raising prices and income levels. But nothing could bring demand up to meet supply, so eventually, surpluses resulted — aggravated, in fact, by the very price increases that had been intended to help the farmer.

Glossary

  • allocation of resources
    Apportionment of productive assets among different uses.
  • competitive price system
    An arrangement of manufacturers in constant contest with one another to make their prices for their products the most attractive, either simply by lowering them or by adding incentives, e.g., payment plans, etc.
  • demand curve for loanable funds
    A curve showing the quantity of loanable funds that will be demanded at each interest rate.
  • demand curve for money
    A curve representing the quantity of money that will be demanded at various interest rates (holding constant real GDP and the price level).
  • economic efficiency
    Generating the greatest results from the fewest resources.
  • equilibrium
    A situation in which there is no tendency for change.
  • invisible hand
    The self-regulating nature of a free-market system, as coined by economist Adam Smith.
  • price controls
    A maximum or minimum cost established by a government for a particular good.
  • productive resources
    Materials, labor, or money used to create goods and services.
  • rent controls
    A maximum price imposed by government on how much someone may charge a tenant for a rental property.
  • supply curve
    A curve, usually sloping upward to the right, showing the relationship between a product’s price and the quantity supplied of the product.

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Economics U$A: 21st Century Edition

Credits

Produced by the Educational Film Center. 2012.
  • Closed Captioning
  • ISBN: 1-57680-895-5