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EC 101 Ch1-18 outlines.docx

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CAS EC 101
Neil Watson

1CHAPTER 1Economy oikonomosGreekOne who manages a householdHousehold many decisionsAllocate scarce resources oAbility effort desireSociety many decisionsAllocate resourcesAllocate outputResources are scarce Scarcity the limited nature of societys resourcesEconomics study of how society manages its scarce resourcesEconomists studyHow people make decisions How people interact with one anotherAnalyze forces and trends that affect the economy as a wholeTen Principles of Economics1People face tradeoffsMake decisions oTrade off one goal against anotheroStudenttimeoParentsincomeoSocietyNational Defense vs Consumer GoodsClean Environment vs High Level of IncomeEfficiency vs EqualityEfficiency oSociety getting the most it can from its scarce resourcesoSize of the economic pieEqualityoDistrusting economic prosperity uniformly among the members of societyoHow the pie is divided in to individual slices2The cost of something is what you give up to get itPeople face tradeoffsoMaking decisionsCompare cost with benefits of alternativesOpportunity CostoWhatever must be given up to obtain one item3Rational people think at the marginRational peopleoSystemically and purposefully do the best they can to achieve their objectivesMarginal ChangesoSmall incremental adjustment to a plan of actionMarginal benefits additional benefitsMarginal costs additional costs2Rational decision makeroTake action only if marginal benefitsmarginal costs4People respond to incentivesIncentiveoSomething that induces a person to actoHigher priceBuyersconsume lessSeller produce moreoPublic policyChange costs or benefitsChange peoples behaviorEXAMPLE 2005 to 2008 price of oil in world oil markets skyrocketedoLimited supplies oSurging demand from robust world growthoPrice of gasoline in the United States rose from about 2 to about 4 a gallonoIncreased incentive to conserve gasSmaller cars scooters bicycles mass transitCamels IndiaNew more fuelefficient aircraftAirbus A320 and Boeing 737Moving near an Amtrak station Online coursesSean Diddy Combsflying on commercial airlines 5Trade can make everyone better offTradeoAllows each person to specialize in the activities he or she does bestoEnjoy a greater variety of goofs and services at lower cost6Markets are usually a good way to organize economic activityCommunist Countries central planningoGovernment officials central plannersAllocate economys scarce resourcesWhat goodservice were producedHow much was producedWho producedconsumed these goodsservicesMarket Economy allocates resourcesoThrough decentralized decisions of many firms and householdsoAs they interact in markets for goods and servicesoGuided by prices and self interestAdam Smiths Invisible HandoHouseholds and firms interacting in marketsAct as if they are guided by an invisible handLeads them to desirable market outcomesoCorollary Government InterventionPrevents the invisible hands ability to coordinate the decisions of the households and firms that make up the economy37Government can sometimes improve outcomesWe need governmentoEnforce rules and maintain institutionEnforce property rightsoPromote efficiencyAvoid market failureoPromote EqualityAvoid disparities in economic wellbeingoProperty RightsAbility of an individual to own and exercise control over scarce resources oMarket failureSituation in which the market on its own fails to produce an efficient allocation of resources oCauses for market failureoExternalityImpact of one persons actions on the wellbeing of a bystanderoMarket powerAbility of a single economic actor or small group of actors to have a substantial influence on market prices oDisparities in economic wellbeingMarket economy rewards peopleAccording to their ability to produce things that other people are willing to pay forGovernment intervention public policiesMay diminish inequalityProcess far from perfect8A countrys standard of living depends on its ability to produce goods and serviceLarge differences in living standards oAmong countriesoOvertime Explanation differences in productivity ProductivityoQuantity of goods and services produced from each unity of labor inputoHigher productivity Higher standard of livingoGrowth rate of nations productivityDetermines growth rate of its average income9Prices rise when the government prints too much moneyInflationIncrease in the overall level of prices in the economyCauses for largepersistent inflationoGrowth in quantity of moneyValue of money falls10Society faces a shortrun tradeoff between inflation and unemploymentShortrun effects of monetary injection
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