UMD ECON 200 - CHAPTER 1- Ten Principles of Economics

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CHAPTER 1- Ten Principles of EconomicsHistory: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 astronomy but wantedto do something different. Wanted to study peopleWhat did he write?"The Wealth of Nations"1776, declaration of independence & very influential.Used scientific method to explain why countries were rich andsome were poor.What is the difference between then and now? Is it still the same?18th Century-Economies were based on agriculture but industrial rev. was 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.How people and other decision makers in an economy interact with each otherHow 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 arelimited.PRINCIPLES OF HOW PEOPLE INTERACTExchange- Act of trading.-in a voluntary exchange, both parties get something they 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. How are goods produced?3. For whom are the goods produced?4. Who decides?-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 other goodsex: stock exchanges- money exchanged for rights to share in corp rightex: 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” topromote 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, 2012Q: Why are some countries rich?HOW THE ECONOMY AS A WHOLE WORKSPRINCIPLE #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 : an increase in the overall level of prices in the economyo The culprit is often the growth in the quantity of moneyo ex: Zimbabwe overprinting moneyPRINCIPLE #10: Society Faces A Short-Run Trade-Off Between Inflation And UnemploymentMost economists describe the short-run effects of monetary injections as follows:- 1.Increasing the amount of money in the economy stimulates theoverall 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 : fluctuations in economic activity, such as employment and production- 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 printsCONCLUSION:How People Make Decisions1:People Face Trade-offs2:The Cost of Something Is What You Give Up to Get It3:Rational People Think at the Margin4:People Respond to IncentivesHow People Interact5:Trade Can Make Everyone Better Off6:Markets Are Usually a Good Way to Organize Economic Activity7:Governments Can Sometimes Improve Market OutcomesHow the Economy as a Whole Works8:A Country's Standard of Living Depends on Its Ability to Produce Goods and Services9:Prices Rise When the Government Prints Too Much Money10:Society Faces a Short-Run Trade-off between Inflation and UnemploymentKey Conceptsscarcityeconomicsefficiencyequality1. opportunity cost2. rational people3. marginal change4. incentive5. market economy6. property rights7. market failure8. externality9. market power10. productivity11. inflationbusiness cycleFunction: how one variable relates to another variable. How an independent variable affects a dependent variable. -independent variable-dependent variable- Y(income)=b+mx(education


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UMD ECON 200 - CHAPTER 1- Ten Principles of Economics

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