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Chapter 1

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Economics (Arts)
ECON 208
Mayssun El- Attar Vilalta

Chapter 1 – Economic Issues and Concepts Sept.11.12 Complexity of the modern economy: - Economic transactions - Economy is a complex system - Individuals provide the goods and services other individuals desire - Self-organizing economy: interaction of self-interested people creates social order (foundation of economic order) - Efficient organization: the spontaneous social order is relatively efficient - Adam smith (1723-1790) – “an economy organized by free markets behaves almost as if it were guided by an invisible hand” - Efficiency refers to organizing available resources to produce the goods and services that people need/wants and by using the fewest possible resources to do so - Aiming to satisfy unlimited human wants and needs with scarce resources Main characteristics of market economies: - Self-interest guides individuals (buy/sell what’s best for them) - Individuals respond to incentives (sell more with high prices, buy more with low prices) - Prices and quantities are set in relatively free markets in which individuals trade voluntarily - Institutions created by the state protect private property and enforce contractual obligations (fair trade and exchange in the economy) - Self-interest and incentives determine market prices and quantities produced - This occurs within an institutional framework Scarcity, choice, and opportunity cost: - Land, labor, capital - Resources = factors of production - Outputs = goods and services (tangible and intangible) - Scarcity means need for choice leading to opportunity cost - Opportunity cost: benefit given up by not using resources in the best alternative way Key economic problems: 1. What is produced and how - resource allocation determines the quantities of goods that are produced - what combination of civilian and military goods will be chosen - will the economy be inside the PPB curve (efficient or inefficient) 2. What is consumed and by whom - what determines how economies distribute total output - if and why are there inequalities with distribution - is there a surplus or deficit of goods/services - are there idle resources and should the government be concerned (i.e. high unemployment rates) 3. Why are resources sometimes idle 4. Is the productive capacity (PPB) growing - growth = outward shift - efficiency = production on the curve Who makes the choices and how: - Individuals own factors of production and sell to producers Flow of income and expenditure: - Individuals own FOP, sell services (in factor markets) of the factors to producers and receive payments in return (incomes) - Distribution of income = how the nation’s total income is distributed among its citizens, determined by the price that each type of factor service receives in factor markets - Maximizing decisions: consumers/producers are the basic decision makers, assumption that everyone tries to do as best as possible for themselves (i.e. profit maximizers) - Marginal decisions: firms/consumers who are trying to maximize need to weigh the costs/benefits of their decisions at the margin, buy a good only if you think the benefit to you in terms of extra utility exceeds the marginal cost Complexity of production: - Spe
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