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ECON 101 Notes Ch1-3.pdf

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ECON 101
Jiahua Chen

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 abstraction→simplify 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 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 • The expansion of production possibilities - and increase in the standard of living - is called economic growth Key factors influence economic growth: technology change & capital accumulation • • Technology: development of new goods and of better ways of producing G&S • Capital accumulation: growth of capital resources, includes human captal • Opportunity cost of economic growth is less current consumption • David Ricardo: 19 Century British economist, grandfather of intl’ trade theory, influential in pioneering the theory of comparative advantage, interesting and bright guy, lo
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