ECON 101 Chapter Notes - Chapter 1: Opportunity Cost, Human Capital, Market Failure

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21 Oct 2015
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Chapter 1 Notes
- Choices are necessary because resources are scarce
oLimitations on income, time, etc.
Resource: anything that can be used to produce something else
- Land, labor, capital, human capital
Scarcity: condition arising when there is not enough of a resource to satisfy all the ways society
wants to use it
Opportunity cost: the next-best thing given up to choose something else
Trade-off: comparison of cost and benefits
Marginal decision/marginal analysis: deciding how much of an activity to do
- All economic predictions are based on the principle that consumers respond to incentives
oConversely, changes in peoples’ behavior is unlikely if incentives are constant
Trade: tasks are divided (specialization) and goods/services are exchanged
- Consumers benefit from trade
Equilibrium: a condition in which no individual would be better off doing something different
- Markets move toward equilibrium because people respond to incentives
Efficiency: an economy’s resources are used efficiently when they are used in a way that best
achieves society’s goals
- People benefit from efficiency, but compromising efficiency for equity is sometimes
desirable
- Markets usually lead to efficiency because people usually exploit gains from trade
oMarket outcomes can be inefficient during a market failure
In these cases, pursuit of self-interest makes society worse off
Government intervention may bring such a market closer to
efficiency
- One person’s spending is another person’s income
Inflation: rise in overall prices due to overall spending exceeding what can be produced
- Government can change spending using macroeconomic policy:
oTaxes
oDirect spending on military, etc.
oQuantity of money