ECON 010 Lecture Notes - Lecture 1: List Of Fables Characters, Allocative Efficiency, Optimal Decision
Econ010 Chapter 1: Foundations and Models
Scarcity: unlimited wants>limited resources available to fulfill wants
Economics: study of choices people make to attain goals given scarce resources
Economic model: simplified version of reality used to analyze real world economic situations
Market: group of buyers and sellers of a good/service and institution or arrangement by which they
come together
Marginal analysis: analysis that involves comparing marginal benefits/costs
Trade-off: b/c of scarcity, producing more of one good or service means producing less of another
Opportunity cost: highest valued alternative that must be given up to engage in an activity
Centrally planned economy: gov decides how economic resources will be allocated
Market economy: decisions of households and firms interacting in markets allocate economic resources
Mixed economy: most economic decisions result from interaction of buyers and sellers in markets but
gov plays significant role in allocation of resources
Product efficiency: good/service produced at lowest possible cost (b/c of competition among firms)
Allocative efficiency: production is in accordance with consumer preference; every good/service is
produced up to point where the last unit provides a marginal benefit to society equal to marginal cost of
producing it; achieved when combination of competition among firms producing mix of goods/services
consumers prefer most
Voluntary exchange: both buyer and seller of product are made better off by transaction (otherwise,
they would not have agreed upon it)
Equity: fair distribution of economic benefits
Economic variable: something measurable that can have diff values (ie. Wages)
Positive analysis: concerned with what is
Normative analysis: concerned with what ought to be
Microeconomics: how households and firms make choices, how they interact in markets, how gov
attempts to influence choices
Macroeconomics: study of economy as a whole (ie, inflation, unemployment, economic growth)
Three key economic ideas
People are rational
• Not that everyone knows everything or always makes the best decisions
• Consumers and firms use all available info to achieve goals
• Weight benefits/costs, choosing action only if benefit>cost
People respond to economic incentives
• Ex: more costly for banks to install security measures than avg. robbery cost
• Estonia: $ incentive to raise birth rates
Optimal decisions are made at the margin
• Marginal benefit (MB) vs marginal cost (MC)
• Optimal decision is to continue any activity up to the point where MB=MC
Efficiency and equity
Competition: forces firms to continue producing goods/services as long as additional benefits to
consumers>additional cost of production
Inefficiency: sometimes from gov intervention (ie. Import limitation)
Efficiency: sometimes from gov intervention (ie. Related with environmental costs); not always desirable;
trade-offs btwn efficiency and equity
Economic models
1) Assumptions (simplifications)
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Document Summary
Scarcity: unlimited wants>limited resources available to fulfill wants. Economics: study of choices people make to attain goals given scarce resources. Economic model: simplified version of reality used to analyze real world economic situations. Market: group of buyers and sellers of a good/service and institution or arrangement by which they come together. Marginal analysis: analysis that involves comparing marginal benefits/costs. Trade-off: b/c of scarcity, producing more of one good or service means producing less of another. Opportunity cost: highest valued alternative that must be given up to engage in an activity. Centrally planned economy: gov decides how economic resources will be allocated. Market economy: decisions of households and firms interacting in markets allocate economic resources. Mixed economy: most economic decisions result from interaction of buyers and sellers in markets but gov plays significant role in allocation of resources. Product efficiency: good/service produced at lowest possible cost (b/c of competition among firms)