ECON101 Lecture Notes - Absolute Advantage, Corn Laws, Relative Price

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28 Jan 2013
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Chapter 1
What is Economics?
Economy: Greek, “one who manages a household”
Scarcity: Out inability to satisfy all our want, we make choice because of this
Incentive(reward/ penalty) Choice Cost
Individuals/ societies must choose among available alternatives
Economics: the social science that studies the choices that individuals, bizes, GOVs,
and the entire societies make as they cope with scarcity and the incentives that
influence and reconcile those choices. Is the study of how individuals and societies
use limited resources to satisfy unlimited wants.
Micro: study of individual economic agents and markets: households, firms
Macro: study of economic aggregates: national and international: inflation,
unemployment, economic growth
Positive analysis: to describe how the economy functions, “What is”, can be tested
Normative analysis: relies on value judgements to evaluate or recommend alternative
policies, “What ought to be”, cannot be tested
Economic method: (Scientific) bovers a phenomenon simplifying(using ceteris
paribus and abstractionsimplify reality) assumptions/ formulate a hypothesis
generate predications test the hypothesis
Ceteris paribus: holding everything else constant
G&S: the objects that people value and produce to satisfy human wants
G&S are produced by using factors of production (productive resources)
Factors of production: Land (natural resources), Labour (the contribution of human
beings), Capital (plant and equipment), Entrepreneurial ability (the ability to manage
a business)
Resource payment: rent, wages, interest, profit
Social interest: outcome is in the social interest if it uses resources efficiently and
distributes G&S fairly
Tradeoff: giving up one thing to get something else
Big tradeoff: the trade off b/n equality and efficiency
The highest-valued alternative that the give up to get something is the opportunity
cost of the activity chosen
Marginal cost: the opportunity cost of producing one more unit
Marginal beinfit: the benefit of consuming one more unit
Marginal revenue: the change in total revenue resulting from a one unit increase in
quantity sold
Marginal utility: the change in total utility resulting from a one unit increase in the
quantity consumed
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Chapter 2
The Economic Problem: PPF (the Production Possibilities Frontier)
PPF: the production possibilities frontier, a basic tool in economics
PPF: the description of the best possible combination of two goods to produce using
all of the available resources, shows the trade-off b/n more of one good in terms of the
other, assumptions (input endowment, tech, time given), typically bowed-out or linear
(because resources are not equally productive in all activities)
The opportunity cost of an activity is the value of the resources used in the activity
when they are measured by they would have produced when used in their next best
alternative
The slope of the PPF measures the marginal opportunity cost of producing one
good in terms of the amount of the other good foregone
Points inside or on the frontier are attainable, outsiders are unattainable
We achieve production efficiency if we cannot produce more of one good without
producing less of some other good
Points on the frontier are efficient
Points inside the frontier are inefficient, resources are unemployed or misallocated
Every choice along the PPF involves a tradeoff - give up some A to get more B, the
opportunity cost of B is the A forgone
The outward bow of the PPF means that as the quantity produced of each good
increases, so does its opportunity cost
To determine which of the alternative efficient quantities to produce, we compare costs
and benefits.
PPF determines opportunity cost
Preferences: description of a person’s like and dislike, described using the concepts of
marginal benefit and the marginal benefit curve
We measure marginal benefit of a G&S by the amount that a person is willing to pay
for an additional unit of a G&S
The principle of decreasing marginal
benefit: the more we have of any good, the
smaller is its marginal benefit, the less we are
willing to pay for an additional unit of it
Marginal benefit curve: marginal benefit of a
good V.S. The quantity of that good consumed
When we cannot produce more of any one
good without giving up some other good that
we value more highly, we have achieved
allocative efficiency
The point of allocative efficiency is the point
on the PPF at which marginal benefit equals
marginal cost
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