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Economics- Mid1-summary.docx

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Peter Sinclair

Week 1- #1 9/12/2012 7:32:00 AM Microeconimcs deals with individual househholds and firms Equilibrium and particular markets Relative prices Macroecomincs deals with the study of economic aggregates such as: inflation, unemployment, and economic growth Scarcity: refers to the limited nature of society’s resources Economics: Is the study of how society manages its scarce resources including: how peoples decide how much to work, save, and spend, and what to buy. How firms decide how much to produce, how many workers to hire. How society decides how to divide its resources between national defense consumers goods, protecting the environment and other needs In microeconomics we are mainly interested in: the study of the allocation of scare resources which are: resources with alternative uses Scarcity arises from a combination of large human wants or desires and limited resources to attain them. Principle 1: all decisions involve trade offs. Examples: Going to a party the night before midterms leaves less time for studying. Society faces and important tradeoff: efficiency vs. equity Efficiency: getting the most out of scares resources Equity: the distributing prosperity fairly among society’s members Tradeoff: to increase equity, can redistribute income from the well-off to the poor. But this reduces the incentive to work and produce and shrinks the size of the economic pie. Principle 2: The cost of something is what you give up to get it Making decisions requires comparing the cost and benefits of alternative choices. The opportunity cost of any item is whatever me be given up to obtain it. The opportunity cost is the difference from the next best alternative not all of the other alternatives. Opportunity cost includes explicit (out of pocket expenses) and implicit costs (such as foregone earnings) Opportunity cost does not include sunk costs (unrecoverable costs)… costs that must be incurred regardless of which course of action is taken. A firms/person should engage in activity A if the benefits of A exceed the opportunity cost of A. Principle 3: Rational people think at the margin A person is rational if she systematically and purposefully does the best she can to achieve her objectives. Many decisions are not “all or nothing” Principle 4: People respond to incentives incentive: something that includes a person to act, i.e. the prospect of a reward or punishment. Principle 5: Trade can make everyone better off - Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. Principle 6: Markets are usually a good way to organize Economic activity A market is a group of buyers and sellers (they need not be in a single location) Organize economic activity mrans determining: what goods to produce, how to produce them, how much of each to produce, who gets them. Markets failure can come from: lack of competition (monopoly), externalities (pollution), lack of info, public goods Principle 7: Governments can sometimes improve market outcomes - Important role for govt: enforce property rights (with police, courts) - People are less inclined to work, produce, invest or purchase if large risk of their property being stolen. - Governemnt may alter market outcome to promote effieciency Market failure: when the market fails to allocate soceitys resources efficiently  Causes: externalities: when the production or consumption of a good affects bystanders (eg. Pollution) market power: a single buyer or seller has substantial influence on market price (eg. Monopoly) Principle 8: A countrys standard of living depends on its ability to produce goods and services - Huge variation in living standards across countries and over time: -Average income in rich countries is more than ten times average income in poor countries. - The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor - productivity depends on the equipment, skills, and technology available to workers. - Other factors (eg. Labor unioins, competition from abroad) have far less impact on living standards. Week 1 - #2 9/12/2012 7:32:00 AM - Economist play two roles: Scientists: try to explain the world. Policy advisors: try to improve it - In the first role, economists employ the scientific method: the dispassionate development and testing of theories about how the world works. Assumptions & Models - Assumptions simplify the complex world, make it easier to understand. Example: When studying international trade, we might assume the world consists of two countries and two goods. - Economists use models to study economic issues. The production possibilities frontier: Our second model - The PPF is a graph that shows the combinations of two goods the economy can possibly produce given the available production technology. Fixed inputs, (labour capital) We produce technology Points on the PPF (like A and E ) are - attainable - efficient: all resources are fully utilized Points under the PPF (like F) are - possible - not efficient Points above the PPF (Like G) are - not possible Moving along the PPF involves shifting resources. The slope of the PPFtells you the opportunity cost of one good in terms of the other. - Economic growth shifts the PPF outwards and economic. The Shape of the PPF - The PPF could be a straight line, or bow-shaped. Depends on what happens to the opportunity cost as the economy shifts resources from one industry to the other. - If the opportunity cost remains constant, the PPF is a straight line. If opportunity cost of a good rises as the economy produces more of the good, which is more likely the case, then the PPF is bow-shaped. Why the PPF might be Bow-Shaped - when different workers have different skills, which result s in different opportunity costs of producing one good in terms of the other. - the PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs. Eg. Different types of land suited for different uses. Social scientists make positive statements which attempt to describe the world as it is Policy advisors make normative statements, which attempt to describe the world how it should be. Week 2- #1 9/12/2012 7:32:00 AM Exports: Goods produced domestically and sold abroad Imports: Goods produced abroad and sold domestically Absolute advantage: the ability to produce a good using fewer inputs than another producer. If each country has an absolute advantage in one good and specializes in that good, then both countries can gain from trade. Absolute advantage measures the cost of a good in terms of the inputs required to produce it Recall: Another measure of cost is opportunity cost Comparative advantage: The ability to produce a good at a lower opportunity cost than another producer. Differences in opportunity cost and comparative advantage create the gains from trade. When each country specializes in good(s) in which it has a comparative advantage, total production in all countries is higher, the worlds “economic pie” is bigger, and all countries gain from trade. Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods and services. Week 2- #2 9/12/2012 7:32:00 AM Market: a group of buyers and sellers of particular good or service. Competitive market: is one in which there are so many buyers and so many sellers that each has a negligible impact on the market price. Perfectly competitive market:all goods are exactly the same. Buyers and sellers so numerous that no one can affect the market price- each is a “price taker”. In this chapter we assume markets are perfectly competitive Demand Quantity demanded: the amount of any good that buyers are willing and able to purchase at any price. Law of demand: the claim that, other things equal the quantity demanded of a good falls when the price of the good rises. Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. The demand curve shows how price affects quantity demanded, other things being equal. These “other things” are non-price det
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