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Chapter

ECON 208 Chapter Notes -Mixed Economy, Free Market


Department
Economics
Course Code
ECON 208
Professor
Lee Ohanian

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Adrienne Pacini ECON 208 WEEK: September 1, 2009
ECONOMIC ISSUES AND CONCEPTS
The Complexity of the Modern Economy
The Self-Organizing Economy
- Economy: a system in which scarce resources are allocated among competing uses
- An economy based on free-market transactions is self-organizing
- “Spontaneous economic order” is produced when people follow their own self-interest
o It is self-interest rather than benevolence that motivates people
o Therefore, self-interest is the foundation of economic order
Efficient Organization
- Economic order is relatively efficient
- Efficiency is attained when the largest amount of goods and services are produced with the
least possible amount of resources
- Free-markets are guided by an “invisible hand
o Referring to the spontaneous order that is produced
Main Characteristics of Market Economies
- Self-interest: buying and selling what seems best for them
- Incentives: sellers want to sell more when prices are high and buyers want to buy more
when prices are low
- All activities in the market are governed by institutions
o Private property
o Freedom of contract
o The rule of law
Scarcity, Choice, and Opportunity Cost
Resources
- Three categories: land, labour, and capital
o Land: what exists naturally (forests, lakes, crude oil)
o Labour: mental and physical human resources
o Capital: aids to production (tools, machinery, buildings)
- Factors of production: resources used to produce goods and services
- Goods: tangible commodities
- Services: intangible commodities
Scarcity and Choice
- Scarcity of resources causes a problem
o Deciding what to produce and how much each person will consume
- With scarcity, choices must be made
- With choices, there is the existence of cost
- 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
- Production possibilities boundary: a curve showing which alternative combinations of
commodities can be attained if all available resources are used efficiently
o It is the boundary between attainable and unattainable output combinations
o The curve illustrates three concepts: scarcity, choice, and opportunity cost
Scarcity: unattainable combinations
Choice: choosing among alternative points
Opportunity cost: negative slope of the curve
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