Micro econ notes Economics the study of how a society firm house hold or an individual manages scarce resources to fulfill many and competing wants Scarcity a situation in which unlimited wants exceeds the limited resources available to fulfill those wants Scarcity causes tradeoffs opportunity cost Opportunity cost what someone gives up to get something time money utility Utility in economics approximately means satisfaction Microeconomics how individuals make decisions how people interact with one another Macroeconomics analyzes the forces and trends that effect the economy as a whole unemployment inflation standard of living Principles of decision making 1 People face trade offs opportunity cost 2 The cost of something is what you re willing to give up to get it 3 Ration people think on the margin marginal cost vs marginal benefit 4 People respond to incentives a The decision to choose one option over another occurs when marginal benefits are greater than marginal cost 5 Trade can make everyone better off a Each party allocates their tie and resources to the product service that they are most efficient at producing providing 6 Markets are a good way to organize economic activity 7 Government can make market activities smoother improve market outcomes a Enforce rules laws b Property rights c Promote efficiency d Promote equality avoid monopoly 8 A country s standard of living depends on the ability to produce goods and services a Productivity the quantity of goods and services produced by each unit worker Good productivity leads to a good standard of living 9 Prices rise when the government prints too much money The Roles of The Economist Scientists try to explain the world country etc Policy Advisors try to improve the world country etc Scientific method Collect data experiment make informed decisions about what is going on in the economy Dispassionate development and testing of theories Economists as policy advisors Positive versus Normative Analysis Positive statement objective fact based attempt to describe the world as it is The price of gasoline has gone down because the price of crude oil has gone down Normative Statements subjective tries to describe the world as it should be The price of rent is too high Ways in which societies organize economies Central planning See Cuba North Korea The coordination problem set output targets for all goods with no data to determine which goods are in demand and which goods are not Creates surpluses of undesired goods and shortages of desired goods Is ultimately a waste of resources The incentive problem no adjustment for surpluses and shortages Market Economy See US Japan Determined by the interactions of households Dollar votes Good Service success is determined by the consumer willingness to pay WTP a buyers willingness to pay for a good is the maximum amount the buyer will pay for that particular g Market Outcomes 1 Free markets allocate the supply of goods to the buyers who value those goods the 2 Free markets allocate the demand for goods to the sellers who can produce those goods 3 Free markets produce the quantity of goods that maximizes both consumer and most at the least cost producer surplus