FSU ECO 2013 - Chapter 2: Intro to Macroeconomics

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Chapter 2 Intro to Macroeconomics Opportunity Cost the highest valued alternative sacrificed in order to choose another option o value is subjective o can only be measured by the decision maker o cost is a way to partly measure opportunity cost Value in Trading o When individuals engage in voluntary exchange both are better off o By channeling resources to those who value them most trades create value and increases society s wealth created by the given resources Transaction Costs complete an exchange time effort and other resources needed to search out negotiate and provide buyers and sellers information at a lower cost and arrange o High transaction costs high trade barrier o Middlemen trades between them Lower the transaction cost Ex Famers grocery stores consumer Ex Manufacturer car dealer consumer Property Rights rights to control and obtain the benefits from a good or resource o Private Property Rights include Right to exclusive use of property Legal protection against theft damage Right to transfer sell exchange property o Incentives to Private Property Rights Private owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring wishes of others Private owners want to care for the property that they own Private owners have an incentive to conserve for the future particularly if property is expected to increase in value Private owners have incentive to lower the change that their property will cause damage to property of others o Private Ownership and Markets Ownership causes trade in markets Recognizing private property rights leads to economic growth Production Possibilities Curve produced assuming all possible combinations of total output that could be Fixed amount of productive resources A given amount of technical knowledge Full and efficient use of those resources o Shifting The Curve Outward Increase in economy s resource base expands ability to produce goods services Producing current goods vs investing in goods for the future Advancement in technology Innovation invention and creation of new methods creative destruction An improvement in the rules under which an economy functions Changes that promote social cooperation By working harder and giving up leisure Sacrifice leisure for production Specialization and Division of Labor o Goods are produced more efficiently o Law of Comparative Advantage total output of a group of individuals will be greatest when output of each good is produced by the person with the lowest opportunity cost of that good It s a win for both sides o Trade allows mass production and innovation o When one person s income increases others often do too Economic Organization most economies use a mixture of both methods o Market Organization Capitalism Limited government role Private parties make own plans o Political Organization Socialism Government is more involved in economy regulations Can be in the form of a dictatorship democracy etc


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FSU ECO 2013 - Chapter 2: Intro to Macroeconomics

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