What is a market? Who solves the three fundamental questions?

A market is a mechanism through which buyers and sellers interact to set prices and exchange goods and services à in a market system, there are gains from trade! Through trade, one attains a good because he imposes a higher value on the good!

Prices coordinate the decisions of producers and consumers in a market. Higher prices tend to reduce consumer purchases and encourage production. Lower prices encourage consumption and discourage production. Prices are the balance wheel of the market mechanism.

Market equilibrium: At market equilibrium everybody who was willing to exchange goods has done so. Markets are steadily solving the three fundamental questions! 
--> they balance all the forces operating on the economy, markets are finding a market equilibrium of supply and demand.

How are the fundamental questions solved?

• What
  - Through the daily consumption decisions, the kind of goods and services, that will be produced is determined
  - Firms are motivated by the desire to maximize profits by producing the desired goods
• How
  - determined by the competition among the producers; best way for producers to meet price competition and maximize profits is to keep costs at a minimum by adopting the most efficient methods of production
• For whom (who is consuming and how much)
  - depends in large part on the supply and demand for the factors of production à they determine the wage rates, land rents, interest rates and profits; by adding up the all revenues a individual receives for his factors of production, one attains the persons market income

Core determinants of the shape of our economy are the dual monarchs of tastes and technology

• Tastes determine to a large extent the point on the PPF
• Technology limits the choices of the consumers to the points within and on the PPF

Adam Smiths discovery

• „by pursuing his own interest, he frequently promotes that of soceity more effectually than when he really intends to promote it“
• under limited conditions, a perfectly competitive economy is efficient
• however, there are market failures
  - Monopolies and other forms of imperfect competition
  - spillovers and externalities outside the marketplace