ECON200 Ch 2 and 3 02 07 2012 Two branches of economics Microeconomics study of the small specific goods and services industries individuals and firms Macroeconomics study of the large how the overall economy behaves Why economists disagree Economists often disagree on public policy o They have differences in Descriptions of how the economy operates positive economies How to evaluate the consequences of policies Differences within Normative economies normative economies Economists may have different values leading them to disagree about the policies that the government should pursue o Example One economist may have values which favor policies that redistribute wealth more evenly another may have values which favor less government interference in the distribution of wealth The economist as a Policy Advisor Economists in Washington o Council of Economic Advisers Advise the president Write the annual Economic Report of the President o Department of treasury o Dpt of labor o Dpt of justice o Congressional budget office o The federal reserve CHAPTER 3 Interdependence and the Gains from Trade The Role of Exchange Both parties in a voluntary trade benefit An opportunity for mutually beneficial trade arises when individuals firms or countries own or desire different goods Productions possibilities frontier graph of the combinations of various goods that an economy can produce with its current resources and technology Exports goods produced domestically and sold abroad To export to sell domestically produced goods abroad Imports goods produced abroad and sold domestically To import purchase goods produced in other countries One way to measure the cost of a good is to figure out what inputs are required to produce it When country A is able to produce a particular good using fewer resources than country B would need to produce the good we say that country A has an absolute advantage in producing the good If each country has an absolute advantage in one good and specializes in tat good then both countries can gain from trade ECON200 ch 3 and 4 02 07 2012 The producer who has the smaller opportunity cost from producing a particular good is said to have a comparative advantage in producing that good The gains from trade arise from comparative advantage Differences in opportunity costs lead to gains from trade Specialization leads to gains even if one country has an absolute advantage in both goods David Ricardo British economist established the principle of comparative advantage in the early 1800s He said that Portugal had an absolute advantage in producing both wool and wine But Portugal had a comparative advantage in producing wine and Britain had a comparative advantage in producing wood Trade was beneficial to both countries Trade between Individuals benefits each Countries individuals may lose Who benefits from reducing barriers to trade Producers of the products that experience a rise in exports Consumers of products whose import rises Who loses Producers of the products that compete with imports Consumers of products whose export rises The benefits of economic interdependence All countries benefit from trade Doesn t matter if one country is rich the other poor one large the other small Gains need not be equitably distributed CHAPTER 4 Market a group of buyers and sellers of a particular good or service can be highly organized o new york stock exchange can be less organized o market for ice cream Competitive Market many buyers and many sellers each has a negligible impact on market price The basic competitive model Builds on 3 assumptions national consumers profit maximizing firms and competitive markets These assumptions determine how consumers behave how firms behave and how the market mediates their interaction Government is ignored in the basic model in order to isolate private decision making the model ignores government because we need to see how an economy without a government might function before we understand the role of government Assume there are many firms selling equivalent products to many consumers customers consider these items interchangeable Assume there is a going price market price Assume firms can provide as much as consumers will buy and each firm can sell as much as it wants Assume that if a firm charged any more than the going pice then it would lose all of its sales Assume there are many firms selling equivalent products to many consumers 02 07 2012 Note Saying products are equivalent means the firms are selling items that the consumers consider to be interchangeable assume there is a going price or market price assume firms in aggregate can provide as much as consumers will buy and each firm can sell as much as it wants assume that if a firm charged any more than the price then it would lose all its sales economists label this case perfect competition in perfect competition each firm is a price taker which simply means that because it cannot influence the market price it must accept that price The firm takes the market price as given because it cannot raise its price without losing all sales and at the market price it can sell as much as it wishes Similiarly if a consumer offers less than the market price no one will sell to him Consumers are also price takers Firms in competitive markets all charge the same price This is a stylized view of markets integrated the assumptions of self interested consumers profit maximizing firms and perfect competition into a theory with predictive However the real world is not exactly like the model so the It can be tested by comparing its predictions with outcomes power theory is not exact of actual markets Economists recognize that while the competitive market may not provide a perfect description with its predictions matching actual outcomes well not perfectly Monopoly the only seller in the market sets the price there are other types of markets between perfect competition and monopoly Demand Describes how the quantity of goods and services bought can change with changes in a number of variable like income social trends and population economists often treat price as the most important determinant of the level of demand Individual Demand definition of demand curve a curve which shows the quantity demanded at each price An Individual Demand Curve The demand curve gives the quantity demanded at each price when everything else is held constant A demand curve slopes downward from left to right When the price of goods increase
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