ECON 200 Chapter 1 09 02 2010 Scarcity society with limited resources and therefore cannot produce all the goods and services people wish to have Economics the study of how society manages its scarce resources Economists study how people make decisions how much they work what they buy how much they save and how they invest their savings how they interact with one another 10 Principles of Economics 1 People Face Trade Offs other resources the more one spends on one thing the less they can spend on the Efficiency society is getting the maximum benefits from its scarce Equality the benefits from efficiency are distributed uniformly among society s members 2 Cost is what you give up to get something making decisions requires comparing costs and benefits of alternative courses of action Opportunity Cost whatever must be given up to obtain some item 3 Rational People think at the margin Rational People people who systematically and purposefully do the best they can to achieve their objectives typically compare marginal benefits and marginal costs o Takes an action if and only if the marginal benefit of the action exceeds the marginal cost Marginal Changes small incremental adjustments to a plan of action 4 People respond to incentives Incentive something that induces a person to act such as the prospect of a punishment or a reward 5 Trade can make people better off Japan is a large competitor in the global economy Trade between two countries can make each country better off 6 Markets are usually a good way to organize economic activity central planning only the gov t could organize economic activity in a way that promoted economic well being for the country as a whole Market Economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services Prices are the instrument with which the invisible hand directs economic activity 7 Governments can sometimes improve market outcomes market economies need institutions to enforce property rights so individuals can own and control scarce resources Property Rights the ability to own and exercise control over scarce resources two reasons for the gov t to intervene in the economy are to promote efficiency or promote equality Market failure a situation in which a market left on its own fails to Externality the impact of one person s actions on the well being of allocate resources efficiently a bystander Market Power the ability of a single economic actor or small group of actors to have a substantial influence on market prices 8 A Country s standard of living depends on its ability to produce goods and services Productivity the quantity 9 Prices rise when the government prints too much money Inflation an increase in the overall prices in the economy o Inflation is caused by growth in the quantity of money so the value of the money 10 Society faces a short run trade off between inflation and unemployment increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services higher demand may cause firms to raise their prices and also encourages them to hire more workers reducing unemployment and also produce a larger quantity of goods and services Business Cycle fluctuations in economic activity such as unemployment and production of goods and services Chapter 2 The Economist as a Scientist The Role of Assumptions Economists study natural experiments offered by history Economists make assumptions because they can simplify the complex world and make it easier to understand o The art is in deciding which assumptions to make Economic Models firms The Circular Flow Diagram a visual model of the economy that shows how dollars flow through markets among households and o Households and firms interact in two types of markets Markets for goods and services households buy the output of goods and services that firms produce Markets for factors of production households sell firms buy The Production Possibilities Frontier a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology o Points on the production possibilities frontier rather than inside represent efficient levels of production Microeconomics and Macroeconomics Micro the study of how households and firms make decisions and how they interact in markets Macro the study of economy wide phenomena such as inflation unemployment and economic growth The Economist as a Policy Advisor Positive Statements claims that attempt to describe the world as it is o Can confirm or refute Normative Statements claims that attempt to describe how the world should be Why Economists Disagree Economists may disagree about the validity of alternative positive theories about how the world works Economists may have different values and therefore different normative views about what policy should try to accomplish ECON200 09 02 2010 Economics is the study of how best to allocate scarce resources among competing uses Micro vs Macro Micro how households and firms make decisions and how they interact in markets Macro the study of how economy wide phenomena including inflation unemployment and economic growth o Closely related but address two different things Trying to maximize profits Theme How do we get goods and services so everyone is satisfied Produce more goods and services o To do this you need land labor and capital aka resources inputs or Factors of Production Price stability Produce more jobs Capital a tool money to produce more goods Assumptions and Models understand The Economist as Policy Advisor Assumptions simplify the complex world making it easier to As policy advisors economists make normative statements which attempt to prescribe how the world should be o Normative statements cannot be refuted or confirmed only positive statements can o Normative a value judgment o Positive describes a relationship The Circle Flow Diagram a visual model of the economy shows how dollars flow through markers among households and firms Two players households and firms Two markets market for goods and services and market for factors of production Week 9 7 9 16 09 02 2010 The Production Possibilities Frontier a graph that shows the combinations of goods that the economy can possibly produce given the available resources and the available technology Ex o two goods computers and wheat o
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