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Econ200!Txtbk!Notes!!Chapter1!Economy:!comes!from!Greek!phrase!“one!who!manages!a!household”!• Society!must!allocate!people!to!various!jobs!and!allocate!the!amount!of!goods!and!services!that!it!produces,!like!a!house!must!allocate!how!to!employ!its!few!people!living!in!it!to!the!various!jobs!around!the!home.!!Scarcity:!Society!has!limited!resources!and!cannot!produce!all!the!goods!and!services!that!people!want.!!Economics:!The!study!of!how!society!manages!its!scarce!resources.!!• Economists!study!how!people!make!decisions!such!as!how!much!they!work!and!what!they!buy.!They!study!the!relationships!btwn!people,!like!buyers!and!sellers.!And!they!study!trends!that!affect!the!economy,!such!as!the!growth!in!average!income!or!unemployment!rates.!!!101PRINCIPLES:1How1Individuals1Make1Decisions11:#People#Face#Trade#Offs:#G To!get!something!we!like,!we!give!up!something!we!like!!G Example:!choosing!to!spend!money!on!one!good!or!service!gives!up!the!money!you!could!be!spending!on!another!good!or!service.!(How!does!a!family!spend!their!income?)!!G Efficiency1vs.1Equality:!o Obtaining!maximum!benefits!from!scarce!resources!OR!distributing!the!benefits!uniformly!among!society’s!members.!!2:#The#Cost#Of#Something#Is#What#You#Give#Up#To#Get#It:##G Decisions!require!comparing!the!cost!and!benefits!of!alternative!courses!of!action!G Example:!Is!the!cost!of!going!to!college!(giving!up!your!time!that!could!be!spent!getting!a!job)!worth!the!value!of!an!education?!!G Opportunity1Cost:!What!you!give!up!to!obtain!a!certain!item.!!3:#Rational#People#Think#at#The#Margin:#G Doing!the!best!one!can!to!achieve!his!or!her!ob j ectives,!give!the!available!opportunities!G Example:!Firms!deciding!how!many!workers!to!hire!and!how!much!of!their!products!to!manufacture/sell!to!maximize!profit!G Marginal1Changes:!small!incremental!adjustments!to!an!existing!plan!of!action.!G Rational!decision!makers!take!an!action!only!if!the!marginal!benefit!of!the!action!exceeds!the!marginal!cost.!4:#People#Respond#to#Incentives:#G Incentives!induce!a!person!to!act,!such!as!the!prospect!of!a!punishment!or!reward!G Example:!a!higher!market!price!gives!customers!an!incentive!to!buy!less!G If!policy!changes!incentives,!people!feel!obligated!to!alter!their!behavior.!G Example:!Seatbelt!law!is!an!incentive!for!people!to!drive!faster!because!they!believe!that!their!survival!rate!in!an!accident!is!lower.!!How1People1Interact15:#Trade#Can#Make#Everyone#Better#Off:#G Trade!between!countries!is!not!negative!competition!G Allows!for!specialization!in!activities!people!do!best!G Trading!allows!people!to!buy!a!greater!variety!of!goods!and!services!at!lower!costs.!!6:#Markets#Are#Usually#A#Good#way#to#Organize#Economic#Activity:#G Market!Economies!allow!for!decisions!of!a!central!planner!to!be!replaced!by!the!decisions!of!millions!of!firms!and!households.!!G No!one!person!watching!over!the!economic!wellGbeing!of!society,!but!instead!people!who!are!interested!in!their!individual!decisions.!!G Market!prices!reflect!both!the!value!of!a!good!to!society!and!the!cost!to!society!of!making!that!good.!!7:#Governments#Can#Sometimes#Improve#Market#Outcomes:#G Government!enforces!property1rights!so!individuals!can!own!and!control!scarce!resources!G Example:!a!farmer!wont!grow!food!if!he!expects!his!crops!to!get!stolen!or!a!restaurant!wont!make!food!without!ensuring!that!the!customer!will!pay.!!G Government!also!promotes!efficiency!and!promotes!equality!(enlarges!the!economic!pie!or!changes!how!the!pie!is!divided).!!G Market1Failure:!Situations!in!which!the!market!on!its!own!fails!to!produce!an!efficient!allocation!of!its!resources.!!G Externality:!The!impact!of!one!person’s!actions!on!the!wellGbeing!of!a!bystander;!possible!cause!of!a!market!failure.!Example:!pollution!G Market1Power:!The!ability!of!a!single!person!or!small!group!to!influence!market!prices;!another!possible!cause!of!market!failure.!!How1The1Economy1Works1As1a1Whole:18:#A#Country’s#Standard#of#Living#Depends#on#It’s#Ability#to#Produce#Goods#and#Services:#G Living!standards!differ!in!countries’!productivity:!the!amount!of!goods!and!services!produced!from!each!unit!of!labor!input.!!G Example:!in!countries!where!workers!can!produce!a!large!quantity!of!goods/services!per!unit!of!time,!most!people!living!there!enjoy!a!higher!standard!of!living.!!G Growth!rate!of!a!nation’s!productivity!determines!the!growth!rate!of!its!average!income.!!G Effect!of!Public!Policy:!“How!will!it!affect!our!ability!to!produce!goods!and!services?”!9:#Prices#Rise#When#the#Government#Prints#Too#Much#Money:#G Inflation:!an!increase!in!the!overall!level!of!prices!in!the!economy!G Growth!in!the!quantity!of!money!causes!inflation;!when!the!government!creates!large!quantities!of!the!nation’s!money,!the!value!of!the!money!falls.!!10:#Society#Faces#A#ShortWRun#TradeWOff#Between#Inflation#and#Unemployment:#G ShortGrun!effects!of!monetary!injections:!trade!between!inflation!&!unemployment!o Increasing!$!in!economy!stimulates!overall!level!of!spending!!higher!demand!of!goods/services!o Higher!demand!cause!firms!to!raise!their!prices,!higher!more!workers,!and!produce!a!larger!quantity!of!goods/services!o More!positions!available!=!lower!unemployment!rates.!!G Trade!off!plays!key!role!in!Business1Cycle:!irregular!and!unpredictable!fluctuations!in!economic!activity.!(measured!by!production!of!goods/services!or!employment!rate)!G Effects!of!Policy!Makers:!Influence!demand!of!goods!and!services!by!regulating!the!amount!that!the!govt!spends,!the!amount!it!taxes,!and!the!amount!of!money!it!prints.!!!!!!!!!!!!!!!!Chapter2!Scientific1Method:!Development!and!testing!of!theories.!Interplay!between!theories!&!observations!Example:!Inflation!Theory!hypothesizes!that!inflation!occurs!when!the!government!prints!an!excess!of!money.!Tested!by!analyzing!the!prices!and!money!from!different!countries.!!!Assumptions!simplify!the!complex!world!and!make!it!easier!to!understand.!Example:!thinking!of!international!trade!between!2!countries!each!with!one!good!versus!attempting!to!learn!about!the!numerous!countries!and!their!thousands!of!goods!makes!it!easier!to!understand!the!big!picture!and!main!concept.!!Models1allow!us!to!see!what!is!truly!important!by!potentially!omitting!details!and!discluding!every!tiny!feature!of!the!economy.!By!doing!so,!models!simplify!reality!to!improve!our!understanding!of!it.!!G


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UMD ECON 200 - Chapter 1

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