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Hannah Holmes

ECONOMICS NOTES CHAPTER 1: Basic Principles of Microeconomics Economics  the study of how society allocates its resources to satisfy people’s wants  resources are scarce, meaning they are usually limited  resources are what are used to produce something else (goods and services ie. labour, land, machinery)  there is a limit on how much production of goods and services can occur do the scarcity of resources Micro: focuses on individual parts of the economy- how households and firms interact Macro: focuses on the economy as a whole- how inflation, unemployment and economic growth affect economy Different Types of Economy Market Economy  allocates resources through the decentralized decisions of firms and households  households decide what to buy and who to work for  firms decide how much to produce and who to hire Command/ Centrally Planned Economy  all production and distribution decisions are made by a central authority (ie. government) Mixed Economy  a combination of both market and command economy Opportunity Costs  everything you have to give up in order to attain a certain something  the cost of the best foregone alternative  example: to attend McMaster it costs 25,000 a year; you could have spent that money on something else, such as a car o implicit costs o explicit costs Marginal Thinking  marginal changes are small, incremental adjustments to an existing plan of action  example: a firm will wonder “what will happen to the profit if we decide to produce one more good?”  people make decisions by comparing marginal benefits to marginal costs  when marginal benefits exceed marginal costs, a decision is proved worth it Adam Smith  observed that households and firms act as if they are guided by an “invisible hand”  consumers choose freely what they buy  producers choose freely what they produce and sell  the market settles on a product distribution and prices that are beneficial to all the individual members of an economic community  greed drives people towards beneficial behaviour  greed pushes people to maximize profits (by perhaps undercutting competitors with low prices and making smart investments)  students decide to pay an upfront cost of attending school because they believe it will eventually provide them with a higher income  effects take place dynamically and automatically Markets Move Towards Equilibrium Economic Equilibrium  when there is no incentive for any economic actors to change their behaviour  profits have been maximized and no changes will benefit the actor  markets usually reach equilibrium through changes in prices  prices guide decision makers to reach outcomes that maximize the welfare of an economic community Gains From Trade  in an market economy, people engage in trade with one another  we specialize in tasks we do best and trade with others for the things they can provide  we have gains from trade Efficiency and Equity  efficiency is when an economy`s resources are used efficiently when they are used to maximize the welfare of a society (economics decisions)  markets that are left to operate freely usually lead to efficiency  equity involves the fair distribution of resources (political decisions)  market failure occurs when the market fails to allocate resources efficiently  when failure occurs, the government can intervene to promote efficiency and equity Causes of Market Failure  an externality- the impact of one person or firm’s actions on the well-being of a bystander  market power- the ability of a single person or firm to unduly influence market prices  some goods simply aren’t suited for the market and do not succeed (ie. organ donations) Economists Roles
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