Chapter 1 Ten Principles of Economics 1 People Face Tradeoffs To get one thing you have to give up something else Making decisions 2 The Cost of Something is What You Give Up to Get It Decision makers have to consider both the requires trading off one goal against another obvious and implicit costs of their actions 3 Rational People Think at the Margin A rational decision maker takes action if and only if the marginal benefit of the action exceeds the marginal cost People Respond to Incentives Behavior changes when costs or benefits change 4 5 Trade Can Make Everyone Better Off Trade allows each person to specialize in the activities he or she does best By trading with others people can buy a greater variety of goods or services 6 Markets Are Usually a Good Way to Organize Economic Activity Households and firms that interact in market economies act as if they are guided by an invisible hand that leads the market to allocate resources efficiently The opposite of this is economic activity that is organized by a central planner within the government Governments Can Sometimes Improve Market Outcomes When a market fails to allocate resources efficiently the government can change the outcome through public policy Examples are regulations against monopolies and pollution 7 8 A Country s Standard of Living Depends on Its Ability to Produce Goods and Services Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living Similarly as a nation s productivity grows so does its average income 9 Prices Rise When the Government Prints Too Much Money When a government creates large 10 quantities of the nation s money the value of the money falls As a result prices increase requiring more of the same money to buy goods and services Society Faces a Short Run Tradeoff Between Inflation and Unemployment Reducing inflation often causes a temporary rise in unemployment This tradeoff is crucial for understanding the short run effects of changes in taxes government spending and monetary policy Chapter 2 Thinking Like an Economist Lecture 1 on ELMS Economics The study of how best to allocate scarce resources among competing uses Microeconomics vs Macroeconomics Microeconomics is the study of how households and firms make decisions and how they interact in specific markets A microeconomist might study the effects of rent control on housing in New York City the impact of foreign competition on the U S auto industry or the effects of compulsory school attendance on workers earnings Macroeconomics is the study of economy wide phenomena A macroeconomist might study the effects of borrowing by the federal government the changes over time in the economy s rate of unemployment or alternative policies to promote growth in national living standards Models Assumptions Assumption the simplification of the complex world to make it easier to understand ex When studying international trade consider only 2 goods and 2 countries Models The form of an assumption Economists as Scientist Scientific Statements the testing of theories about how the world works 1 Positive Statements vs Normative Statements Positive statement describe the world as it is can be confirmed refute Ex prices rise when the government increases the quantity of money Normative statement describes how the world should be Models Circular Flow Diagram Includes two actors households firms Includes two markets Factors of Production labor land capital buildings machines in production households give themselves firms receive factors households receive wages rent profit in return Markets for Goods and Services finished goods and services households spend money for G S firms get revenue Production Possibilities Frontiers PPF Possible points on line possible and efficient inside line possible but inefficient or unemployment of resources outside line impossible Opportunity Costs What must be given up to obtain an item moving along graph represents how society faces a tradeoff PPF shifters Economic Growth additional resources shifts PPF outwards Improvement in technology of a good shifts only that good s intercept Chapter 4 Market Forces of Supply and Demand L2 Good Markets on ELMS PPF shape bowed outward Quantity Demanded Law of Demand the claim that other things equal the quantity demanded of a good falls when the price of the good rises Demand Schedule Curve Market Demand Curve vs Individual Demand Curve Market Demand Curve is sum of all the Individual Demand Curves Demand Curve Shifters no of buyers demand increases as of buyers increases income normal good demand increases as income increases inferior good demand decreases as income increases prices of related goods complements when price of good A increases demand for good B decreases substitutes when price of good A increases demand for good B increases tastes expectations one expects the price or Qd to change in the near future Quantity Supplied Law of Supply the claim that other things equal the quantity supplied of a good rises when the price of the good rises Supply Schedule Curve 2 Market Supply Curve vs Individual Supply Curve Market Supply Curve Sum of Individual Supply Curves Supply Curve Shifters input price technology no of sellers expectations Supply and Demand together Equilibrium Intersection of S D Surplus Shortage When supply is greater than demand When supply is less than demand Analyzing changes in Equilibrium Chapter 10 National Output Measuring a Nation s Income in textbook National Output on the Circular Flow Diagram Can be found by looking at household spending Gross Domestic Product measures the total income of everyone in the economy GDP also measures total expenditures because a dollar spent is a dollar Incomes and Expenditures received for the seller Analyzing the definition a given period of time Market Value The market value of all final goods services produced within a country in Everything measured in some units dollars On things with a market value ex exclude doing hw Include tires sold direct to consumer exclude tires sold to build car Includes intangible services dry cleaning therapy etc Must have been currently produced Must have been produced within the borders Final Goods and Services Produced Within a country in a given period For the year or quarter only Components of GDP Consumption C spending by households on goods services w the exception of new housing Investment I purchase of goods that will be used in the
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