ECON 1 Lecture Notes - Lecture 1: Invisible Hand, Externality, Economic Equilibrium

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25 Feb 2017
Econ 1
Week 1:
chapter 1
10 Principles of Economics
idea 1
resources are limited
-Scarcity-*resources are limited*- the limited nature of society’s resources
-Economics- the study of how society manages its scarce resources
how do we decide how to divide our resources?
-Incentives- something that induces a person to act (ie the prospect of reward or punishment)
-market- group of buyers and sellers (not necessarily in same location)
-market economy- allocates resources through the decentralized decisions of many households
and firms as they interact in markets
-when Verizon makes iphones $50, demand will go up and they will quickly raise prices
-invisible hand - somehow there is a force to promote general economic well being within
households and firms
Idea 2-
Markets are usually a good way to organize economic activity
-invisible hand works through the market
Idea 3-
People face tradeoffs
-price is main driver for choosing which tradeoff
-going to a movie- takes money and time
-money for tickets+ value for time (could have been working/studying, etc)
-society faces efficiency vs equality**
-communism where everyone is the same is not healthy economy nor is ignoring the poor
-healthy balance
-efficiency- when society gets the most from its scarce resources
-equality- when prosperity is distributed uniformly among society’s members
-opportunity cost- what you give up to obtain something
-making decisions requires comparing the costs and benefits of alternative choices
idea 4-
Rational people think at a margin
-rational people- do the best they can to achieve their objectives; make decisions by evaluating
costs and benefits of marginal changes, incremental adjustments to an existing plan
-marginal changes-analyze margin of cost and if the benefit is as marginal, better, or
worse than the cost
-buying apples buy one get one 50% off (is the additional unit’s satisfaction/your benefit
going to outweigh the additional cost? if yes, you buy, if no, you don’t)
-marginal cost of an airline ticket
Idea 5
The power of Trade
-rather than being self sufficient, people specialize in producing one good in exchange for other
-benefit from trade and specialization
-trade can make everyone better off (for efficiency reasons etc)
idea 6
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Importance of wealth and Economic growth
-a country’s standard of living depends on its ability to produce goods and services
-huge variation in living standards across countries
-ave income in rich countries is more than ten times average income in poor countries
-productivity- efficiency of labor- amount of goods and services produced per unit of labor
-factors influencing productivity: competition abroad, equipment, skills
-when theres more competition, theres drive for innovation
Idea 7
Institutions matter
-important role for government is to enforce property rights (police, courts, etc)
-people less inclined to work if their property wont be stolen
Market failure-when market fails to allocate society’s resources efficiently -departure from
efficient productivity
-externalities-when production of a good affects bystanders (eg pollution)
-market power- a single buyer or seller has substantial influence on market price
-public policy may promote efficiency* and equity*
idea 8
economic booms and bursts cannot be avoided but can be moderated
-policymakers use fiscal policy and monetary policy to attempt to smooth out this economic
-eg borrowing at a lower rate
idea 9
prices rise when the government prints too much money
-inflation - increase in the general level of prices
-for long run, inflation is almost always caused by excessive growth in the quantity of money,
causing the value of money to fall
-faster the government creates money, greater the inflation rate
-inflation is tied to interest rates
-adjustments take place when gov is good/bad
-if bank doesn’t have money, borrow from the gov to give money, but charge intrest—
causes inflation
Idea 10
central banking is a hard job
-society faces a short-run tradeoff between inflation and unemployment
-in short run, economic policies push inflation and unemployment in opposite directions
-aka, more people are employed
-once more people employed, spending steadies and then slows down, must lay people
off and unemployment goes up again
-other factors can make this tradeoff more or less favorable but the tradeoff is always present
-government tries to steady these fluctuations
-federal Reserve is the US’s central bank
-“the Fed” is in charge of money supply
-helping the economy be stable
-balancing inflation and unemployment
Chapter 2
Economist as a Scientist
-play two roles:
1)scientists - try to explain the world
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2) Policy advisors- try to improve it
Assumptions and Models
-assumptions simplify the complex world make it easier to understand
-ex- to study international trade, assume two countries and two goods
model-a simplified representation of a more complicated reality
Circular flow diagram
-def- a visual model of the economy- shows how money flows through markets and households
-factors:labor, land, capital
-actors-households, firms
-households: own factors of production, sell/rebt them to firms for income, buy and consume
firms-buy hire factors of production, sell goods/services
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