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Two branches of economicsMicroeconomics-study of the small: specific goods and services, industries, individuals, and firmsMacroeconomics-study of the large :how the overall economy behavesWhy economists disagreeEconomists often disagree on public policyThey have differences in:Descriptions of how the economy operates (positive economies)How to evaluate the consequences of policies (normative economies)Differences within Normative economiesEconomists may have different values, leading them to disagree about the policies that the government should pursueExample: 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 wealthThe economist as a Policy AdvisorEconomists in WashingtonCouncil of Economic AdvisersAdvise the presidentWrite the annual Economic Report of the PresidentDepartment of treasuryDpt of laborDpt of justiceCongressional budget officeThe federal reserveCHAPTER 3Interdependence and the Gains from TradeThe Role of ExchangeBoth parties in a voluntary trade benefitAn opportunity for mutually beneficial trade arises when individuals, firms, or countries own or desire different goodsProductions possibilities frontier- graph of the combinations of various goods that an economy can produce with its current resources and technologyExports: goods produced domestically and sold abroadTo export: to sell domestically produced goods abroadImports: goods produced abroad and sold domesticallyTo import: purchase goods produced in other countriesOne way to measure the cost of a good is to figure out what inputs are required to produce itWhen 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 goodIf each country has an absolute advantage in one good and specializes in tat good, then both countries can gain from tradeThe producer who has the smaller opportunity cost from producing a particular good is said to have a “comparative advantage” in producing that goodThe gains from trade arise from comparative advantageDifferences in opportunity costs lead to gains from tradeSpecialization leads to gains even if one country has an absolute advantage in both goodsDavid Ricardo- British economist- established the principle of comparative advantage in the early 1800sHe 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 woodTrade was beneficial to both countriesTrade between:Individuals-benefits eachCountries- individuals may loseWho benefits from reducing barriers to trade?Producers of the products that experience a rise in exportsConsumers of products whose import risesWho loses?Producers of the products that compete with importsConsumers of products whose export risesThe benefits of economic interdependence:All countries benefit from tradeDoesn’t matter if one country is rich, the other poor, one large, the other smallGains need not be “equitably” distributedCHAPTER 4Market- a group of buyers and sellers of a particular good or servicecan be highly organizednew york stock exchangecan be less organizedmarket for ice creamCompetitive Marketmany buyers and many sellerseach has a negligible impact on market priceThe basic competitive modelBuilds 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 interactionGovernment 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 wantsAssume that if a firm charged any more than the going pice then it would lose all of its salesAssume there are many firms selling equivalent products to many consumers.(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 priceassume firms (in aggregate) can provide as much as consumers will buy, and each firm can sell as much as it wantsassume that if a firm charged any more than the price then it would lose all its saleseconomists label this case perfect competitionin 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 wishesSimiliarly, if a consumer offers less than the market price, no one will sell to himConsumers are also price takersFirms in competitive markets all charge the same priceThis is a stylized view of markets integrated the assumptions of self-interested consumers, profit maximizing firms and perfect competition into a theory with predictive powerHowever the real world is not exactly like the model, so the theory is not exactIt can be tested by comparing its predictions with outcomes of actual marketsEconomists recognize that, while the competitive market may not provide a perfect description with its predictions matching actual outcomes, well not perfectlyMonopoly- the only seller in the market, sets the pricethere 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 Demanddefinition of demand curve: a curve which shows the quantity demanded at each priceAn Individual Demand CurveThe demand curve gives the quantity demanded at each price when everything else is held constantA demand curve slopes downward from left to right:When the price of goods increase, the demand for that good usually decreases- When everything else is


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UMD ECON 200 - Lecture notes

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