Chapter 1: Ten Principles of Economics- The economy is like a household; people play different roles.- Scarcity : society has limited resources and therefore cannot produce all goods andservices people wish to have. There aren’t enough resources for everyone to be atthe same social level.- Economics : the study of how society manages its scarce resources. A leader or society can dictate resources. Economists study how buyers and sellers interact, prices, trends, etc. People influence and economy.How People Make DecisionsPrinciple 1: People face trade-offs:- If you choose to buy/do one thing, you can’t do the other (give something up in exchange for something else.)- Equality : benefits are distributed uniformly among society’s members.- Efficiency : society is getting the maximum benefits from its scarce resources.o Equality causes a society to become less efficient: the more people get equal portions, the les goods and services are produced (Trade-off.)Principle 2: The cost of something is what you give up to get it- Opportunity cost: what you give up to get that item. Principle 3: Rational people think at the margin- Rational people : systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. - Marginal changes: small incremental adjustments to a plan of action.o Marginal cost (manufacturer) and marginal benefits (willingness to pay fora good/ consumer)Principle 4: People respond to incentives- Incentive : something that induces a person to act.Principle 5: Trade can make everyone better off- Each country/ people benefit(s) from trade because it allows them to specialize in what they do best and gain the most goods and products.Principle 6: Markets are usually a good way to organize economic activity- Market economy : an economy that allocates resources through the decisions of many firms and households as they interact in markets for goods and services. Noone regulates it (consumer/producer driven.)o Invisible hand: households and firms are guided to make smart decisions for the market. Buyers care about prices (price determines demand) Sellers care about production prices (prices determines supply) Price guides buyers and sellers (maximize the economy.)Principle 7: Governments can sometimes improve market outcomes- Property rights : the ability of an individual to own and exercise control over scares resources (government regulates property rights so the invisible hand works properly.)o Government should intervene in the economy because it promotes efficiency and equality.- Market failure : a situation in which a market left on its own fails to allocate resources efficiently. - Externality : the impact of one person’s actions on the well being of a bystander.o Causes market failureo Example: pollution- Market power : the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.o Another potential cause of market failure.Principle 8: A country’s standard of living depends on its ability to produce goods and services.- Productivity : the quantity of goods and services produced from each unit of labor input.o Standard of living is based on productivity (both national and individual.) Principle 9: Prices rise when the government prints too much money.- Inflation : the increase in the overall level of princes in the economy.o Too much money in circulationo Caused by rapid growth in printed moneyPrinciple 10: Society faces a short-run trade-off between inflation and unemployment.- An increase in money increases spending and demand, supply and workers hired, and as a result, unemployment is lowered. o Trade-off between inflation and unemployment.- Business cycle : fluctuations in economic activity such as employment and productionChapter 2: Thinking Like an Economist - Economics= theory and observation- The economy consists of buying, selling, trading working, hiring, manufacturing etc.- Circular Flow : a diagram that shows how dollars flow through markets among households. o Firms vs. households Factors of production: firms produce goods and services using inputs (land, labor, money.) Households own factors of productionand consume all gods and services produced. Markets for goods and services- households= buyers, firms= sellers. Markets for factors of production- household= sellers, firms= buyers.- 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.- Microeconomics : the study of how households and firms make decisions and howthey interact in markets.- Macroeconomics : the study of economy- wide phenomena (inflation, unemployment, economic growth.)- Positive statements : descriptive, “how the world is”- Normative statements : prescriptive “how the world should be”Chapter 3: Interdepended and the Gains from TradeA Parable for the Modern EconomyProduction Possibilities- The proposed trade between two workers offers each of them a combination of two goods that would be impossible in the absence of trade. Trade allows each to consume more of each good.o Straight line when trade switches off at a constant rate.o If producer chooses to be self-sufficient rather than trade with each other, then he consumes exactly what he produces. o Shows trade-offsSpecialization and Trade- As a result of specialization and trade, each producer can consume more of both goods without working any more hours.Comparative Advantage: The Driving Force of SpecializationAbsolute Advantage- Absolute Advantage : the ability to produce a good using fewer inputs than another producer.Opportunity Cost and Comparative Advantage- Opportunity Cost : what we give up to get that item. o Time spent producing one good takes away time to produce the other good. o Measures tradeoff- To calculate opportunity cost: example= meat and potatoes. Producing 1 ounce ofpotatoes takes 10 minutes of work, and when the farmer spends 10 minutes producing potatoes, he spends 10 minutes less producing meat. Because the rancher needs 20 minutes to producer 1 ounce of meat, 10 minutes of work would yield to ½ ounce of meat. Hence, the rancher’s opportunity cost of producing 1 ounce of potatoes is ½ ounce of meat.o The opportunity cost of meat is the inverse of the opportunity
View Full Document
Unlocking...