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 Economicsa. Principles 6-10Current Lecture6. Principlea. Markets are usually a good way to organize economic activityi. Markets are usually a good way to organize economic activityii. Communist countries - Central Planners are the government1. They allocate the economy's scarce resources, what goods and services areto 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 intervention1. Governments can hurt markets7. Principlea. Governments can sometimes improve market outcomesi. 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. Principlea. A country’s standard of living depends on its ability to produce goods and servicesi. Large differences in living standards1. Among countries2. Over timeii. Explanation - differences in productivityiii. 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. Principlea. Prices rise when the government prints too much moneyi. Inflation - an increase in the overall level of prices in the economyii. 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. Principlea. Society faces a short-run trade-off between inflation and unemploymenti. 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 activity1. Employment 2. ProductionFED - can buy bonds (increase money supply) or sell bonds (reduce money supplyCan have a little inflation by increasing money supply but you reduce
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