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Chapter 1

Chapter 1 Economic Issues and Concepts.docx

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Economics (Arts)
ECON 208
Mayssun El- Attar Vilalta

Chapter 1 Economic Issues and Concepts 1.1 The complexity of the Modern Economy  Raw materials, parts, tools, perishables, manufactured goods  Importing, producing, transporting, selling  Economy is a system in which scarce resources (labour, land, machines) are allocated among competing uses The Self-Organizing Economy  An economy based on free-market transaction is self-organizing, meaning when individual consumers and producers act independently to pursue their own self-interests, responding to prices determined in open markets, the collective outcome is coordinated (spontaneous economic order)  Self-interest, not benevolence, is the foundation of economic order Efficient Organization  Efficiency means that the resources available to the nation are organized so as to produce all the goods and services that people want to purchase and to produce them with the least possible amount of resources  Relatively efficient order that emerges spontaneously out of the many independent decisions made by those who produce, sell, and buy goods and services. These decision makers all respond to the same set of prices, which are determined in markets that respond to overall conditions of national scarcity or plenty. Main Characteristics of Market Economies  Self-interest: individuals buy and sell what seems best for them and their families  Incentives: sellers want to sell more when prices are high, buyers want to buy more when prices are low  Market prices and quantities: determined in free-markets in which would-be sellers compete to sell their products to would-be buyers  Institutions: all these activities governed by a set of institutions largely created by government (private property, freedom of contract and the rule of law) 1.2 Scarcity, Choice, and Opportunity Cost  Scarcity leads to economic problem of choice  Economics is the study of the use of scarce resources to satisfy unlimited human wants. Resources  Categories: Land (all natural endowments), labour (all mental and physical human resources), capital (all manufactured aids to production)  All of these are Factors of production: resources used to produce goods (tangible commodities: cars) and services (intangible commodities: education)  Production: act of making goods and services  Consumption: act of using goods and services to satisfy wants Scarcity and Choice  A decision to have more of something requires a decision to have less of something else(cost)  Scarcity implies that choices must be made, and making choices implies the existence of costs Opportunity Cost  Limited resources force a choice among competing alternatives  Every time a choice is made, opportunity costs are incurred  Opportunity cost: the cost of using resources for a certain purpose, measured by the benefit given up by not using them in their best alternative use; the cost measured in terms of other goods and services that could have been obtained instead Production Possibilities Boundary  A production possibilities boundary illustrates three concepts: scarcity, choice, and opportunity cost. Scarcity is indicated by the unattainable combinations outside the boundary; choice, by the need to choose among the alternative attainable points along the boundary; and opportunity cost, by the negative slope (shows the combinations that are attainable when all resources are efficiently used; when all resources are being used efficiently, producing more of one good requires producing less of others) of the boundary  Production possibilities boundary: a curve showing which alternative combinations of commodities can just be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations  Concave shape - Opportunity cost of either good increases as we increase the amount of it that is produced; straight line – opp cost of one good stays constant, no matter how much of it is produced Four Key Economic Problems What is Produced and How?  Resource allocation: the allocation of an economy’s scarce resources of land, labour, and capital among alternative uses; determines the quantities of various goods that are produced  Choosing to produce a particular combination of goods means choosing a particular allocation of resources among the industries or regions producing the goods.  Resources scarce, so must use efficiently, look at available methods of production of each goods What is Consumed and by whom?  Microeconomics is the study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system and government policies that seek to influence it Why are Resources Sometimes Idle? Is Productive Capacity Growing?  Economic growth shifts the production possibilities boundary outward and makes it possible to produce more of all products  Macroeconomics is the study of the determination of economic aggregates, such as total output, total employment, the price level, and the rate of economic growth 1.3 Who Makes the Choices and How? The Flow of Income and Expenditure  P.10 figure -important  Individuals own factors of production – they sell the services of these factors to producers and receive payments in return (incomes) – producers use the factor services that they buy to make goods and service – they sell these to individuals, receiving payments in return (incomes of producers)  Individuals sell the services of the factor that they own in what are collectively called factor markets  Producers sell their outputs of goods and services in what are collectively called goods markets  Distribution of income refers to how the nation’s total income is distributed among its citizens which is largely determined by the price that each type of factor service receives in factor markets Maximizing Decisions  Consumers and producers, government = basic decision makers in market economy  Economists assume that everyone tries to do as well as possible for him/herself (maximizers)  When individuals decide how many factor services to sell to producers and how many products to buy from them, we assume that they made choices designed to maximize their well-being or utility  When producers decide how many factor services to buy from individuals and how many goods to produce and sell to them, we assume that they make choices designed to maximize their profits Marginal Decisions  To maximize, must weigh costs and benefits of decision at the margin  Consumers and producers who are maximizers make marginal decisions – whether to buy or sell a little bit more or less of the many things that they buy and sell.  Voting in an election – you make a total rather than a marginal decision (cant pick diff aspects of diff parties, must vote on a whole) The Comp
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