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Econ Textbook Notes

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McMaster University
Bridget O' Shaughnessy

Chapter 1 9/9/2012 6:51:00 AM The word economy comes from the Greek word for one who manages a household (Economy and households both have to make decisions about how to allocate its scarce resources among its members while considering abilities, efforts, and desires.) Scarcity society has limited resources and so they cannot produce all the goods and services people desire Economics is the study of how society manages its scares resources Economist study: How people make decisions (how much they work, what do they buy, how much they save) How people interact with each other (the multitude of buyers and sellers together determine the price of a good and how much is sold) Analyze forces and trends that effect society as a whole (growth on average income, fraction of the population that cant work) The behavior of an economy reflects the behavior of the people who make up the economy Principal #1 People face tradeoffs To get something that we like we usually have to give up something that we like Guns vs. butter, environment vs. higher standard of living Efficiency is the property of society getting the most it can from its scarce resources (refers to the size of the economic pie) Equity the property of distributing economic prosperity fairly among the members of society (refers to how the economic pie is divided) When the government tries to cut the pie into more equal slices, the pie gets smaller Principal #2 The cost of something is what you give up to get it Making decisions requires comparing the costs and benefits of alternative course of actions Opportunity Costs whatever must be given up to obtain some item (the next best thing) Principal #3 Rational People Think At The Margin Forward looking; costs, benefits additional ALL Rational People systematically and purposely do their best to achieve what their objectives Marginal Changes small incremental adjustments to a plan of action Rational people make decisions by comparing marginal costs and marginal benefits they make decisions if marginal benefits exceed marginal costs Principal #4 People Respond To Incentives Incentive is something that induces a person to act Principal #5 Trade Can Make Everyone Better Off Trade between 2 countries can make both of them better off Trade allows people to specialize in what her or she does best By trading with other, people can buy a greater variety at a lower costs Free trade we are a little bit better off Principal #6 Markets Tend to Increase Efficiency (how much stuff we can make) Compared to central planning communism Proof: not many communist countries left Communism was meant to be equitable, didnt work because lack of incentives Market Economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services Market System are not equitable (if everyone got free coffee, people who dont drink it wouldnt take it) Principal #7 Governments can sometimes eliminate Market Inefficiencies Property Rights the ability of an individual to own and exercise control over scarce resources Governments intervene to promote equality (change how pie is divided) and efficiency (enlarge pie) Market Failure a situation in which a market left on its own fails to allocate resources efficiently caused by: Externality the impact of one persons actions on the well being of a bystander (ex, pollution) Positive: if someone gets their children vaccinated my children will be at less of a risk Negative: governments raise taxes on cigarettes to avoid second hand smoke Market Power the ability of a single economic actor (or small groups of actors) to have a substantial influence on market prices Principal #8 A Countrys Standard of Living Depends on Its Ability to Produce Goods & Services (Productivity) Standard of living per capita GDP Productivity (output of workers) the quantity of goods and services produced from each hour of a workers time Workers in places that produce a large quantity of goods and services per unit in time = higher standard of living Principal #9 Prices Rise When the Government Prints Too Much Money Inflation an increase in the overall level of prices in the economy Happens when there is a increase in money being printed Hyperinflation Zimbabwe: 2009 5.1%, 2008 14.9 billion% Principal #10 Society Faces a Short Run Tradeoff Between Inflation and Unemployment If unemployment goes up inflation goes down
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