CHAPTER 1 Ten Principles of Economics History When did the study of economics begin Field of study that began late 18th century By whom Adam Smith Founder Scottish Prof Read Isaac Newton s work wrote book on wanted to do something different astronomy but Wanted to study people What did he write The Wealth of Nations 1776 declaration of independence very Used scientific method to explain why countries influential were rich and What is the difference between then and now Is it still the same some were poor 18th Century was Economies were based on agriculture but industrial rev underway Way we produce things we produce and how we produce goods are exchanged and have changed Same principle of economics from 18th century can be used today Since then economists have expanded refined the understanding of economics Smith s work offers guidance to today s economists A Yes but still the same just more in depth What is microeconomics How people and other decision makers in an economy make choices with each other How people and other decision makers in an economy interact How resources are allocated to the various possible uses PRINCIPLES OF HOW PEOPLE MAKE DECISIONS Scarcity the limited nature of societies resources many economic decisions are affected when resources are PRINCIPLES OF HOW PEOPLE INTERACT Exchange Act of trading in a voluntary exchange both parties get something they limited want PRINCIPLE 5 Trade can make everyone better off rather than being self sufficient people can specialize in producing one good or service and exchange it for other goods The Japanese as well as the French and the Egyptians and the Brazilians are as much our partners in the world economy as they are our competitors Countries benefit from exchange get a better price abroad for goods they produce buy other goods more cheaply from abroad than could be produced at home 4 Major Economic Questions Have different answers in different situations 1 What is produced 2 3 4 Who decides How are goods produced For whom are the goods produced In some countries governments run the whole or the much of the economy Carl Marx Marxism Approach for communist countries Use central planning Decide on all answers to the questions Theory only the government could organize economic activity to promote economic well being for a country Markets situations in which exchanges occur ex farmer s markets goods money can be exchanged for ex stock exchanges money exchanged for rights to share other goods in corp right ex markets for autos steel etc PRINCIPLE 6 Markets are usually A good way to organize Economic activity Market Economy an economy that allocates resources primarily through the interaction of consumers individuals households and private firms Adam Smith in The wealth of Nations 1776 Consumers and producers act as if led by an invisible hand to promote general economic well being When the government prevents prices from adjusting naturally to supply and demand it impedes the invisible hand s ability to coordinate the decisions of the households and firms that make up the economy PRINCIPLE 7 Governments can sometimes improve outcomes 1 Ways in which government can improve on market outcomes the people and organizations in a market economy can benefit when a gvt provides basic national security including military defense and homeland security provides public safety directly indirectly provide goods and services health care education and mail establishes rules about property and contracts AND enforces those rules police courts etc the gvt can also have a role in helping the economically disadvantaged set up a safety net for the poor defend workers from their employers protect weak firms from stronger competitive laws as in antitrust laws 2 Just because gvt can improve on market outcomes does not mean it will the political process is far from perfect policies are sometimes designed to simply reward the politically powerful PART 3 SEPT 10 2012 Q Why are some countries rich HOW THE ECONOMY AS A WHOLE WORKS PRINCIPLE 8 A Country s Standard Of Living Depends On Its Ability To Produce Goods And Services As productivity Income PRINCIPLE 9 Prices Rise When The Government Prints Too Much Money Inflation economy an increase in the overall level of prices in the o The culprit is often the growth in the quantity of money o ex Zimbabwe overprinting money PRINCIPLE 10 Society Faces A Short Run Trade Off Between Inflation And Unemployment Most economists describe the short run effects of monetary injections as follows 1 Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services 2 Higher demand may over time cause firms to raise their prices but in the meantime it also encourages them to hire more workers and produce a larger quantity of goods and services 3 More hiring means lower unemployment business cycle production fluctuations in economic activity such as employment and policymakers can influence the overall demand for goods and services by o changing the amount that the government spends o the amount it taxes o and the amount of money it prints CONCLUSION How People Make Decisions 1 People Face Trade offs 2 The Cost of Something Is What You Give Up to Get It 3 Rational People Think at the Margin 4 People Respond to Incentives How People Interact 5 Trade Can Make Everyone Better Off 6 Markets Are Usually a Good Way to Organize Economic Activity 7 Governments Can Sometimes Improve Market Outcomes How the Economy as a Whole Works 8 A Country s Standard of Living Depends on Its Ability to Produce Goods and Services 9 Prices Rise When the Government Prints Too Much Money 10 Society Faces a Short Run Trade off between Inflation and Unemployment Key Concepts scarcity economics efficiency equality 1 2 opportunity cost rational people 3 marginal change 4 incentive 5 market economy 6 property rights 7 market failure 8 externality 9 market power 10 productivity 11 inflation business cycle Function how one variable relates to another variable How an independent variable affects a dependent variable independent variable dependent variable Y income b mx education level
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