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Chapter 1

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ECON 200
Robert Schwab

Chapter 1 Tuesday,January 21,2014 7:19 PM scarcity: the limited nature of society's resources economics: study of how the society manage its scarce resources | because resources are allocated through action of households and firms,economics thus study how people make decisions. --- Ten Principles of Economics How People Make Decisions 1. People Face Trade-offs a. every action means giving something up i. A policy to promote sth,must sacrificed sth b. there is no free lunch. c. trade-off the society faces: efficiency and equality 2. The Cost of Something Is What You Give Up to Get It a. opportunity cost b. time is money 3. Rational People Think at the Margin a. economists assume all people are rational-do the best maximize their own benefit b. Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action. i. eat that spoonful of mashed potato or not c. Rational people often make decisions by comparing marginal benefits and marginal costs. i. A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. ii. marginal benefit depends on how many units a person already has. 4. People Respond to Incentives a. An incentive is something that induces a person to act. i. thus >> If a policy changes incentives,it will cause people to alter their behavior. ii. incentives affect decision b. positive incentive: reward; negative incentive: punishment c. rational people respond to incentives by comparing cost & benefits Quick Quiz 5. Describe an important trade-off you recently faced. a. so I have to read my econ200 text before class,I gave up a movie opportunity 6. Give an example of some action that has both a monetary and nonmonetary opportunity cost. a. it is cold out so john doe stayed in bed instead of going to class: monetary opportunity cost is he missed a class which he already paid for (tuition),nonmonetary opportunity cost is he missed the material covered in class which he might have to spend more time to self-teach. 7. Describe an incentive your parents offered to you in an effort to influence your behavior. a. "wash the dishes 5 days a week and I will reward you a dollar" --- How People Interact 8. Trade Can Make Everyone Better Off a. Trade allows each person to specialize in the activities he or she does best.By trading with others,people can buy a greater variety of goods and services at lower cost. i. This reminds me of Sakura.not exactly but similar."trading food".it's like person A goes to Sakura and ordered all fish,B orders all clam,C orders all beef,D orders all fried rice...so on so forth,then in the end we trade the food,everyone is now able to eat just a little bit of everything. 9. Markets Are Usually a Good Way to Organize Economic Activity a. central planned economy v.s.market economy i. invisible hand 1. participants in the economy are motivated by self-interest and that the “invisible hand”of the marketplace guides this self-interest into promoting general economic well-being. 2. buyers look at the price when determining how much to demand,sellers look at the price when deciding how much to supply. a. market prices reflect both the value of a good to society and the cost to society of making the good. ii. Smith's great insight was that prices adjust to guide these individual buyers and sellers to reach outcomes that,in many cases,maximize the well-being of society as a whole. iii. government does not always have the insight. 10. Governments Can Sometimes Improve Market Outcomes a. then,why we need government? i. market economies need institutions to enforce property rights so individuals can own and control scarce resources. 1. 如果不确保⾷食客都会付钱,餐厅不会冒险营业。 ii. 政府介⼊入 allocation of scarce resources 的两个理由 1. promote efficiency a. market failure-when market fails to allocate its resources efficiently i. externality -the impact of one person's actions on the well- being of a bystander 1. e.g.pollution ii. market power -refers to the ability of a single person (or small group) to unduly influence market prices. 1. e.g.垄断资源者可随意定价 2. promote equality a. A market economy rewards people according to their ability to produce things that other people are willing to pay for. i. Inequality lies in the price-people pay differently. Quick Quiz 11. Why is a country better off not isolating itself from all other countries? a. No country is omnipotent,a country has its strength and weakness,by cooperating i.e. trading with others,different countries can specialize in what they are best of.If a country isolates itself from all others it has to do all the work-very inefficient. 12. Why do we have markets,and,according to economists,what roles should government play in them? a. we have markets so households and firms can trade scarce resources.Government cannot do all the job allocating resources because the "invis
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