Chapter 1Scarcity: society with limited resources and therefore cannot produce all the goods and services people wish to haveEconomics: the study of how society manages its scarce resourcesEconomists: 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 another10 Principles of Economics1) People Face Trade-Offsthe more one spends on one thing, the less they can spend on the otherEfficiency: society is getting the maximum benefits from its scarce resourcesEquality: the benefits from efficiency are distributed uniformly among society’s members2) Cost is what you give up to get somethingmaking decisions requires comparing costs and benefits of alternative courses of actionOpportunity Cost: whatever must be given up to obtain some item3) Rational People think at the marginRational People: people who systematically and purposefully do the best they can to achieve their objectives- typically compare marginal benefits and marginal costsTakes an action if and only if the marginal benefit of the action exceeds the marginal costMarginal Changes: small incremental adjustments to a plan of action4) People respond to incentivesIncentive: something that induces a person to act, such as the prospect of a punishment or a reward5) Trade can make people better offJapan is a large competitor in the global economyTrade between two countries can make each country better off6) Markets are usually a good way to organize economic activitycentral planning – only the gov’t could organize economic activity in a way that promoted economic well being for the country as a wholeMarket Economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and servicesPrices are the instrument with which the invisible hand directs economic activity7) Governments can sometimes improve market outcomesmarket economies need institutions to enforce property rights so individuals can own and control scarce resourcesProperty Rights: the ability to own and exercise control over scarce resourcestwo reasons for the gov’t to intervene in the economy are to promote efficiency or promote equalityMarket failure: a situation in which a market left on its own fails to allocate resources efficientlyExternality: the impact of one person’s actions on the well being of a bystanderMarket Power: the ability of a single economic actor or small group of actors to have a substantial influence on market prices8) A Country’s standard of living depends on its ability to produce goods and servicesProductivity: the quantity9) Prices rise when the government prints too much moneyInflation: an increase in the overall prices in the economyInflation is caused by growth in the quantity of money so the value of the money10) Society faces a short run trade-off between inflation and unemploymentincreasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and serviceshigher 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 servicesBusiness Cycle: fluctuations in economic activity, such as unemployment and production of goods and servicesChapter 2The Economist as a ScientistEconomists study natural experiments offered by historyThe Role of AssumptionsEconomists make assumptions because they can simplify the complex world and make it easier to understandThe art is in deciding which assumptions to makeEconomic ModelsThe Circular-Flow Diagram: a visual model of the economy that shows how dollars flow through markets among households and firmsHouseholds and firms interact in two types of marketsMarkets for goods and services-households buy the output of goods and services that firms produceMarkets for factors of production-households sell, firms buyThe 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 technologyPoints on the production possibilities frontier (rather than inside) represent efficient levels of productionMicroeconomics and MacroeconomicsMicro- the study of how households and firms make decisions and how they interact in marketsMacro- the study of economy wide phenomena, such as inflation, unemployment, and economic growthThe Economist as a Policy AdvisorPositive Statements: claims that attempt to describe the world as it isCan confirm or refuteNormative Statements: claims that attempt to describe how the world should beWhy Economists DisagreeEconomists may disagree about the validity of alternative positive theories about how the world worksEconomists may have different values and therefore different normative views about what policy should try to accomplishEconomics is the study of how best to allocate scarce resources among competing usesMicro vs. MacroMicro – how households and firms make decisions and how they interact in marketsMacro – the study of how economy-wide phenomena, including inflation, unemployment, and economic growthClosely related but address two different thingsTrying to maximize profitsTheme: How do we get goods and services so everyone is satisfiedProduce more goods and servicesTo do this, you need land, labor, and capitalaka: resources, inputs or Factors of ProductionPrice stabilityProduce more jobsCapital: a tool (money) to produce more goodsAssumptions and ModelsAssumptions simplify the complex world, making it easier to understandThe Economist as Policy AdvisorAs policy advisors, economists make normative statements, which attempt to prescribe how the world should beNormative statements cannot be refuted or confirmed, only positive statements canNormative – a value judgmentPositive – describes a relationshipThe Circle Flow Diagram: a visual model of the economy, shows how dollars flow through markers among households and firmsTwo “players” – households and firmsTwo markets – market for goods and services and market for “factors of productionThe Production Possibilities Frontier: a graph that shows the combinations of goods that the economy can possibly produce given the available resources and the available technologyEx:two goods – computers and wheatone resource – labor (measured in hours)economy has 50000
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