ECON 201 1st Edition Lecture 1Outline of Last Lecture I. Class Cancelled Outline of Current Lecture Thursday 1/8** Friday discussion section before the midterm there will be a quiz**I. IntroductionA.) The Economic Problem How to allocate resources to the uses that most benefit society.1. The Market (a main source)a. Adam Smith’s Invisible hand  price directs resourcesb. How much coffee you want to have, etc. c. Let individuals see the relative prices of individual activities and that’s how they decide what to pay ford. Price theory 2. Central Planninga. Resources directs by governing body, legislation or dictatorshipb. Some sort of hierarchy that sets allocations c. Corporate hierarchies exist (told when have to teach and what have to teach)3. “Island Economics”a. Very little exchange between individualsb. Self production and self consumption c. Method for deciding how much time and money you are going to commit to your own production (brushing your own teeth)d. Personal hygiene B.) Normative vs. Positive Economic Analysis1. Normative economic question cannot be answered objectively a. Issues of fairnessb. “Good” it would be “good” if we rose the taxes on gasoline c. questions about what is right, best, or fair are normative issues that each individual decides for themselvesd. Subjective2. Positive economic questions have objective answers. They are questions that can be decisively tested, and proven right or wronga. If incomes taxes rise by 5% consumer spending on housing will fall by X%These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.b. ObjectiveC.) Microeconomics vs. Macroeconomics1. Micro is the study of the behavior of individuals/institutions/economic agentsa. What’s the optimal amount of students to enroll in the UOb. How individuals make decisionsc. How decisions are maded. How people’s tastes affect their consumption, spendinge. How countries exchange commoditiesf. Decision or price theory2. Macro is the study of performance of an economy or outcomesa. Unemploymentb. Growth – GDPc. Money and banking, creditd. Overall performance of the economy II. Production Possibilities A.) The production possibilities frontier - The maximum amount of any combination of goods that can be produced- “Production” – the amount produced- “Possibilities” – what is possible- “Frontier” – the edge or limit or boundary- What is possible to do with your time - A two-good economy III. MarketsA market is a mechanism of exchange of goods and services- Not necessarily a fixed/ centralized locationA.) Perfectly Competitive Market1. Many buyers and many sellersa. No single buyer or seller can influence price b. If Starbucks started raising prices on coffee you could go anywhere else (ie. Next door to café roma) but there are so many buyers out there that you can’t argue Starbuck’s pricec. Hard to influence and negotiate your wage2. Full information about the goods and services exchangeda. Consumers know what they are buyingb. Producers know the value of the “money” they receive c. Understand the quality of the product and the quality of the dollard. Thick market of many buyers and many sellers that are fully informed on the quality of the goodsMarkets are two-sided – Demand and Supply- Price is determined by the interaction of supply and demand!! - Joint reasoning - Supply and demand interacting and complicating thingsB.) Demand- Economic demand is the willingness and ability to pay for a good or service at any given price- Maximum that they are willing and able to pay (maybe not happy about it or like it)- Has a need on a survival level (diabetic that needs insulin; cancer patient that needs therapy)1. Law of Demand – at higher prices fewer units, or smaller quantity, of a good or service are demanded. 2. Changes in Demanda. Preferences (you like it and need it in a sense)b. Income (how able you are to pay for something)c. Relative Prices of other goods (Its cheaper to go to Starbucks than make it myself)d. **Need to know their preferences (tastes)** 3. Demand is determined by