Unit 2- Ethical Decision Making Flashcards
Market
a place where goods or services are bought and sold.
Decision Making in the Market
Decisions in the market are made based on price; which is determined by supply and demand.
Main feature of the Market System
- Private ownership of resources to make goods and services
- Voluntary Exchange- Individuals and firms are free to enter into mutually beneficial trades
- Profit Motive: Where economic actors trade to advance their own self-interest
General justifications of the Market system
-Promotion of Efficiency, and hence, welfare.
Arguments Justifying Market Systems
Utilitarian argument- Market systems produces the highest possible level of welfare for society (because they want reach efficiency- greatest output for least input)
Rights-Based argument- market system best protects our liberty, especially with respect to private property.
(Like in Free market system- more freedom to owning private property and trade)
Free Markets and Utility in Adam Smith’s theory:
Market competition ensures the pursuit of self-interest in markets and advances the public’s welfare. (Utilitarianism)
public’s welfare is lowered in markets where government interferes (linked with rights-based argument)
John Locke thought on Free Market
Free-market economy should set rates as govt. Regulation could have unintended consequences
PURE Monopoly Market System
A single firm is the only seller in the market and new sellers are barred from entering.
- One dominant seller
- Control over the supply and price
- Monopoly profit can be made by selling less and charging more
- High Barriers to entry
Ethical Weaknesses of Monopolies
- Violates capitalist justice. -charging more for products than producer knows they are worth
- Violates utilitarianism. -removing incentives to use resources efficiently
- Violates negative rights. - forcing companies to stay out, customers to buy what they do not want with price and quantity they do not want to be determined by the monopoly.
Perfect Competition
A free market in which no buyer or seller has the power to significantly affect the prices at which goods are being exchanged.
- Many sellers, many buyers
- Perfect Knowledge
- Freedom to entry and exit
- Homogeneous goods
- No govt interference
Oligopoly
A market shared by a relatively small number of large firms that together can exercise some influence on prices.
Unethical Practices of Oligopolies
- Price-Fixing
- Manipulation of Supply
- Predatory Price discrimination- Each company lowers prices to knock out the other one.
Main views on Oligopoly Power
- Do-nothing view- Do nothing since the power of oligopolies is limited by competition between industries and by countervailing the power of large groups
- Antitrust View- Large monopoly and oligopoly firms are anticompetitive and should be broken up into small companies
- Regulation View- Big companies are beneficial but need to be restrained by government regulation.
Fraud
Material misrepresentation that is made with an intent to deceive
Fraud Triangle- (Used in auditing to asses the risk of fraud)
- Pressures/strong incentives to do wrong(peer pressure, personal incentives)
- The Opportunity(includes the ability also)
- Ability to Rationalize
Rationalizations of Fraud
- No harm No Foul
- I deserve this
- It is for a good cause
- If I don’t do it someone else will
Rationalizations of Fraud
- I deserve this
- Everyone is doing it
- If I don’t do it someone else will
- It’s what’s best for the company
Market Failure
Failure of free market to allocate resources
Causes for Market Failure
- Perfect Competition- Market fails because they deviate from perfect competition characteristic of efficiency.
- Perfect Rationality- Meaning consumer behaviour is wholly based on maximizing utility, which doesn’t exist, as there is bounded rationality- where lack of info causes consumers not to make choices to maximize utility. Eg- I want ice cream, but the prices are very low, and that’s the only info I have and there seems to be no other reason; I might just assume that the ice cream tastes bad and not buy it.
- Externalities- Positive externalities- Underproduction/consumption; Negative externalities- Overproduction/consumption
- Collective choice- If the people are rational, they will vote for things that will promote their own welfare, which will promote collective welfare (Utilitarianism- self interest advocacy)
Prisoner’s Dilema
The paradox in decision analysis in which two individuals acting in their own self-interests do not result in the optimal outcome.
Remember Dave and Henry- Prisoners
What is an Agent
A party that has been engaged to act on behalf of another (the principal)
- Relationship called Agency Relationship
What is a Fiduciary
A person who has been entrusted with the care of another’s property or assets
-Can make whatever decisions they want with it
Fiduciary relationship has two elements:
Trust and Confidence
What are the three main elements of Fiduciary Duty
- Duty of Candour: to disclose all information that the beneficiary would consider relevant to the relationship
- Duty of Due Care: A care that a reasonable, prudent person would exercise.
- Loyalty: Requires that Fidicuary:
1. Act in the best interest of the beneficiary, and
2. Avoid taking any personal advantage- deriving any benefit from the relationship without the knowledge of the beneficiary.
