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Chapter 1

Chapter 1 Econ

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Department
Economics
Course
EC120
Professor
Olivia Ozlem Mesta
Semester
Fall

Description
Microeconomics: interactions between - individual households and firms – equilibrium in particular markets – relative prices Macroeconomics: inflation, unemployment and economic growth - Whole economy overall rather than just particular parts Scarcity: - limited nature of societies resources - We can’t produce all we want to Economics: - study of how society manages its scare resources - How much to work, save, buy - How much to produce Scarce resources: (best alternative use for resources) - How we make use of the resources we have in more than one way (alternative uses for our resources) - Scarcity arises from a combination of large human wants/desires and limited resources to attain the wants/needs of the society TEN PRINCIPLES Principle 1: People Face Tradeoffs - Efficiency vs Equity - Efficiency: getting most out of scarce resources - Equity: distributing prosperity fairly among societies members - Tradeoff: to increase equity, can redistribute income from well off to the poor - Redistribution in ways that cause the least efficiency loss Principle 2: The cost of something is what you give up to get OPPERTUINTY COST: whatever must be given up by choosing one action over another *opportunity cost can only occur when an action has been taken Opportunity costs include- Explicit Costs (out of pocket expenses) ex. Tuition, books, room and board Implicit Costs (such as foregone earnings) ex. Lost income from choosing school over employment EX. Going on a 4 week vacation - Explicit costs include the cost of the trip itself along with associated costs - Implicit costs include the cost in time away from employment Sunk Costs: unrecoverable costs - Costs that are incurred regardless of which course you take *Decision Making ° A firm/person should engage in one particular activity if those activities benefits exceed the opportunity cost Principle 3: Rational people think at the margin Rational: thinking systematically does the best to achieve objectives But many decisions are not ‘all or nothing’, but involve marginal changes Marginal change: incremental adjustments to an existing plan - Evaluating the costs and benefits of marginal changes is an important part of decision making Ex. A firm considers whether to increase output, comparing the cost of the needed labor and materials to the extra revenue Incentive: something that induces a person to act i.e the prospect of a reward or punishment - Rational people respond to incentives because they make decisions by comparing costs and bnefits Ex. In response to higher gas prices, sales of hybrid cars rise Ex. In response to higher cigarette taxes, teen smoking falls HOW PEOPLE INTERAT The Economy: a group of people interacting with each other Principle 5: Trade can make everyone better off - Rather than being self-sufficient, people can specialize in producing one good/service and exchange for other countries specialized goods/services Specialization: individuals and organizations focusing on the limited range of production tasks they perform best Benefits of Specialization—get a better price abroad for goods they produce, and buy other goods more cheaply from abroad than could be produced at home Principle 6: Markets are usually a good way to organize economic activity Market: group of buyers and sellers “Organize economic activity” means –what goods to produce – how to produce – how much of each to produce- and who gets the products ° Households and firms acts as if ‘led by an invisible hand’ to promote general economic wellbeing Invisible hand: aka. Invisible hand of the market-- self-regulating nature of the market place Invisible hand works through the price system: - The interaction between buyers and sellers determines prices of goods/services - Each price reflects the goods value to buyers and the cost of producing the good - Prices guide self-interested households and firms to make decisions that maximize societies economic wellbeing by pursuing own personal interests, individuals and the society can factor the prices of some goods/services in the economy .. Market failures can come from: - Lack of competition eg. Monopoly - Externalities eg. Pollution or fireproofing a home Externality: is a cost or benefit that is not transmitted through prices- when the production of consumption of a good affects bystanders - Lack of information - Public goods—goods that are consumed jointly by many people like national defense **look over more to fully understand** Principle 7: Governments can sometimes improve market outcomes - Important role of g
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