Hi. My name is Dr. Sangaralingam Ramesh.
Welcome to these Henry Stewart Talks,
"Introduction to Microeconomics" series,
talk number three, "Demand and Supply".
What is demand and what is supply?
There are two fundamental theorems of welfare economics.
The first states that markets work best if left to themselves.
In other words, there's no government intervention.
In this case, the market is said to be perfectly competitive and
some assumptions are needed in order to ensure that market works best.
And the first assumption is perfect information.
This essentially means that consumers know all information about
all products in the market and firms know about other firms costs and revenues.
In this perfectly competitive market,
we'll also assume that the price mechanism carries
all the information required by buyers and sellers to buy and sell goods.
So, in this case,
the price mechanism ensures that through buying and selling,
resources such as labor and capital are allocated to efficient projects.
In other words, projects which deliver a high rate of return rather than loss.
The third assumption that we make or the third necessary criteria
for this first fundamental theorem of welfare economics to work is that,
in the economy, there are private property rights.
In other words, people can own land and other productive assets.
So, therefore, giving them an incentive to set up
businesses with the knowledge that they'll be able to keep the profits.
The second fundamental theorem of welfare economics, on the other hand,
states that redistribution of endowments through
lump sum tax may make market outcomes more socially equitable.
So, whereas in the first fundamental theorem,
the endowments or bundle of goods which consumers
and firms initially have may not be socially equitable,
government intervention may actually change these endowments to allow
for an equitable social distribution of the initial endowments in society,
and then if the market is allowed to work and function without government interference,
the same efficient outcome results.
The government can redistribute endowments in society,
the initial holding of property and bundles of goods
by either using a lump sum tax or by using subsidies,
paying firms, for example to lower the costs of production.