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Economics Mid.docx

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Hannah Holmes

Economics MidTerm NotesChapter 1 and 2What is Economics Economics the study of how society manages its scarce resources to satisfy peoples unlimited wantsScarcity the limited nature of societys resources Microeconomics focus on individual parts of the economy How households firms make decisionshow they interact in specific marketsMacroeconomics the economy as a whole Eg inflation Market economy allocates resources through the decentralized decisions of firmshouseholdsHouseholds decide what to buy who to work for Firms decide to hire how how much to produceCommand or centrally planned economyAll production and distribution decisions are made by a central authority like a governmento Eg Former USSRTraditional economy o Economic decisions are based on customs beliefs religion habits o Term is often used to refer to underdeveloped economies that rely heavily on agriculture for domestic consumption subsistence economyMixed economies o Combination of market and comand economieso Canada is a mixed economyo Mostly free market Basic Principles of Economics We assume that when people are making decisions they are acting rationallyEconomic rationality decisions making that maximizes the benefit you receive from your decsionPerfect information everyone knows everything about everythingo Eg Firmsknows our price best technology to use how others will react if they change priceAsymmetrical information in practice its difficult to get perfect information Someone has more info on something than someone else This makes it harder to make the best decisions Resources are Scarce Resource is anything that can be used to make something else We also call resources factors of productionThe big 3 resources o Lando Labour o Capital physical such as buildings and machineryRecently we have been including entrepreneurship as a resourceOpportunity Cost Opportunity cost whatever must be given up to obtain some item Marginal Thinking Marginal changes small incremental changes to a plan of action o Eg a firm may wonder what if I produce just one more goodwhat happens to my profit The Invisible Hand If consumers are allowed to choose freely and producers are also allowed to choose freely then the market will settle on a product distribution and prices that are beneficial to everyoneAll this takes place automatically and dynamically ongoingMarkets Move Toward EquilibriumEquilibrium an economic situation is in equilibrium when there is no incentive for any economic actors households firms governments to change their behavior No individual would possibly be better off doing something different Markets usually reach an equilibrium through changes in prices Efficiency Efficiency the society getting the most it can from its scarce resources the size of the economic pie Markets that are left to operate freely usually lead to efficiencyEquity benefits of the resources of the society are distributed equally among its members how the pie is dividedMarket FailureOccurs when the market fails to allocate resources efficientlyCan be caused by externality or market powerExternality the impact of one persons or firms actions on the wellbeing of a bystander can be either negative or positiveMarket power Ability of a single person or firm to influence market prices Positive Vs Normative StatementsPositive statementsDescribe the world as it is Descriptive analysis Normative statements Suggest how the world should be Prescriptive analysis The Circular Flow DiagramMarkets for Goods and Services Firms sell household buy Households buy Markets for Factors of ProductionHouseholds sell Firms buy Factors of ProductionLand labor capitalentrepreneursIn this diagram the greenarrows represent flows ofincomepaymentsThe redarrows represent flows ofgoodsservices includingservices of the factors of production in the lower halfof the diagramTo keep the graph simplewe have omitted thegovernment financialsystem and foreign sector as discussed on the next slide
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