ECO2030 1nd Edition Lecture 3 Outline of Last Lecture I What is Economics and Principles 1 5 of Economics Outline of Current Lecture II 10 Principles of Economics a Principles 6 10 Current Lecture 6 Principle a Markets are usually a good way to organize economic activity i Markets are usually a good way to organize economic activity ii Communist countries Central Planners are the government 1 They allocate the economy s scarce resources what goods and services are to be produced by whom how much and where Government central planners decide for you rather than you acting out of self interest They have so much planning that they inevitably make mistakes iii When the market economy allocates resources things work better Whenever households and firms interact in markets it sends a signal to the suppliers It is guided by prices and self interest iv Corollary Government intervention 1 Governments can hurt markets 7 Principle a Governments can sometimes improve market outcomes i We need government to enforce rules and maintain institutions enforce property rights promote efficiency and market failure promote equality ii Property rights the ability of an individual to own and exercise control very important for an economy iii Market Power dominance of a single actor on a market have lots of control 8 Principle a A country s standard of living depends on its ability to produce goods and services i Large differences in living standards 1 Among countries 2 Over time ii Explanation differences in productivity iii Productivity quantity of goods and services produced from each unit of labor input Higher productivity higher standard of living Growth rate of a nation s productivity growth rate of the average income 9 Principle a Prices rise when the government prints too much money i Inflation an increase in the overall level of prices in the economy ii Causes for large persistent inflation growth in quantity of money value of money falls Problem is that peoples salary does not go up at the same rate 1 Note Deflation is when prices keep falling problem is people stop buying with the hopes that prices will go further down 10 Principle a Society faces a short run trade off between inflation and unemployment i Short run effects of monetary injections Stimulates the overall level of spending higher demand for goods and services firms raise prices higher more workers and produce more which lowers unemployment ii Key Role analysis of business cycle iii Business cycle fluctuations in economic activity 1 Employment 2 Production FED can buy bonds increase money supply or sell bonds reduce money supply Can have a little inflation by increasing money supply but you reduce unemployment
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