ECON 010 Lecture Notes - Lecture 1: List Of Fables Characters, Allocative Efficiency, Optimal Decision

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31 May 2018
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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)

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