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Lecture 1

ECO1102 Lecture 1: ECO 1102C NOTES 1

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Octavian Strimbu

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ECO 1102 Introduction to Macroeconomics 09/12/2017 Principles of economics Economy: Greek word word for one who manages a household. The management of society's resources (ex: people, land, buildings, machinery) is important because resources are scarce. It is the study of how society manages its scarce resources. Scarcity: The limited nature of society's resources. Economics: The study of how society manages its scarce resources Principle #1: people face tradeoffs There aint no such thing as a free lunch Efficiency: The property of society getting the maximum benefits from its scarce resources. Equity: The property of distributing economic prosperity fairly among the members of society. Principle #2: The cost of something is what you give up to get it Opportunity cost: whatever must be given up to obtain some item. Principle #3: Rational people think at the margin Rational people: People who systematically and purposefully do the best they can to achieve their objectives. Marginal changes: Small incremental adjustments to a plan of action. Principle #4: People respond to incentives Incentive: Something that induces a person to act. Principle #5: Trade can make everyone better off Property rights: The ability of an individual to own and exercise the control over scarce resources. Principle #6: Markets are usually a good way to organize economic activity Market economy: An economy that allocates resources through the decentralized decisions of many firms and households as they are guided by an invisible hand that leads them to desirable market outcomes. In his 1776 book, Adam Smith observed that households and firms interacting in markets acts as if they are guided by an invisible hand that leads them to desirable market outcomes. Principle #7: Gouvernements can sometimes improve market outcomes We need gouvernements for two reasons To enforce property rights Property rights: The ability of an individual to own and exercise control over scarce resources. Because the invisible hand is powerful, but it is not omnipotent. Two broad reasons for the government to intervene in the economy; 1) the goal of efficiency 2)the goal of equity The goal of efficiency: Market failure: A situation in which a market left on its own fails to allocate resources efficiently. Externality: The impact of one persons actions on the well-being of a bystander The goal of equity: Even when the invisible hand is yielding efficient outcomes, it can nonetheless leave sizable disparities in economic well-being. Principle #8: A countrys standard of living depends on its ability to produce goods and services Productivity: The quantity of goods and services produced from each hour of a worker's time. Principle #9: Prices rise when the government prints too much money Inflation: An increase in the overall level of prices in the economy. Principle #10: Society faces a short-run tradeoff between inflation and unemployment This short-run tradeoff plays a key role in the analysis of business cycle. Business cycle: The regular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed. Thinking like an economist The economics as a scientist : The scientific method The scientist method involves observation, theory, and more observation Economists use theory and observation like other scientists, but they do face an obstacle that makes their task especially challenging: Experiments are often difficult in economics The role of assumptions Assumptions can simplify the complex world and make it easier to understand. The art in scientific thinking is deciding which assumptions to make. Economic models Economics also use models to learn about the world that are most often composed of diagrams and equations. Economic models omit many details to allow us to see what is truly important. All the models are built with assumption. Our first model: The circular-flow diagram Circular-flow diagram: A visual model of the economy that shows how dollars flow through markets among households and firms.Microeconomics and Macroeconomics Microeconomics: The study of how households and firms make decisions and how they interact in markets Macroeconomics: The study of economy-wide phenomena, including inflation, unemployment, and economic growth. The economist as a policy adviser When economics are trying to explain the world, they are scientist. When they are trying to help improve it, they are policy advisers. Positive versus normative analysis Positive statements: Claims that attempt to describe the world as it is.(not suggesting to do anything) Normative statements: Claims that attempt to prescribe how the world
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