ECON 102 1st Edition Lecture 2 Outline of Last Lecture Introduction of Economics Key terms and their meanings First Principles o Basic Principles of the Individual Choice Outline of Current Lecture 1 Principles of Individual Choice Cont a Principles of Interaction b Principles that underlie economy wide interactions Current Lecture Interaction choices are a feature of most economic situations o My choices affect you choices and vice versa a Principles of Interaction among individual choices 5 There Are Gains from Trade 6 Market Moves toward Equilibrium 7 Resources Used as Efficiently as Possible 8 Markets Usually Lead to Efficiency 9 Government Intervention can improve Welfare 5 There Are Gains From Trade o Market Economy Individuals engaging in trade they provide goods and services to others and receive goods and services in return o Gains from trade People can get more of what they want through trade than they could if they tried to be self sufficient Specialization A person specializing in the task he or she is good at performing o Increase in output because of specialization o The economy as a whole can produce more when each person specializes in a task and trades with others 6 Market Moves Toward Equilibrium These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o An economic situation is in equilibrium when no individual would be better off doing something different o Any time there is a change the economy will move to a new equilibrium Eg What happens when a new checkout line opens 7 Resources Used as Efficiently as Possible o An economy is efficient if it takes all opportunities to make some people better off without making other people worse off Should economic policy makers always strive to achieve economic efficiency Equity Everyone gets his or her fair share o Equity making life fairer for people at the cost of efficiency 8 Markets Usually Lead to Efficiency o The incentives built into a market economy already ensure that resources are usually pit to good use o Opportunities to make people better more effective 9 Government Intervention can Improve Welfare o When markets don t achieve efficiency government intervention can improve the society s welfare and well being Taxes Quotas etc How markets fail o Individual actions have side effects not taken into account by the market externalities o One party prevents mutually beneficial trades from occurring in the attempt to capture a greater share of resources for itself o Some good cannot be efficiently managed by markets Eg Freeways in Los Angeles Principles that underlie economy wide interactions 10 One person s spending is another person s income Sales of homes fell in 2006 11 Overall spending sometimes gets out of line with the economy s productive capacity Too much supply not enough demand Spending falls short Depression occurs Excessive spending Inflation 12 Government policies can change spending Government can increase decrease their spending to affect the current market
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