Microeconomics ECON 1201
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This 9 page Class Notes was uploaded by Kimberly Clemens on Wednesday January 13, 2016. The Class Notes belongs to ECON 1201 at University of Connecticut taught by Owen Svalestad in Spring 2016. Since its upload, it has received 120 views. For similar materials see Microeconomics in Economcs at University of Connecticut.
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Date Created: 01/13/16
1 Microeconomics 1201 UConn Prof. Owen Svalestad Chapter 1&2 Notes Chapter 1: *Chapter 1 consists of a few basic ideas for economics and then introduces a handful of terms for the rest of the chapter. 1.1 Three Key Economic Ideas 3 Key Economic Ideas: 1. People are rational. Firms and consumers use the best info available to make decisions. They want the benefits to outweigh the cost. However, this doesn’t mean that the best decision is always made/ 2. People respond to economic incentives. People also respond to personal motives (envy, compassion, religion, etc). 3. Optimal decisions are made at the margin. most decisions in life involve doing a little more or a little less, meaning that if you want to save money, you don’t save all of it. Instead, for example, you choose to spend money on coffee at Dunkin’ Donuts only 2 times a week instead of your normal 5 times, therefore spending “a little less” each week. 1.2 The Economic Problem that Every Society Must Solve 3 Fundamental Questions Every Economist Must Ask: 1. What goods and services will be produced? 2. Who will receive these products? 3. How will they be produced? Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. (MB=MC) 2 *These questions are the foreground for many economic problems that are solved in the book and in the real world. It’s smart to know these questions so you know the basics of an economist’s purpose. 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 On a linear graph denoting points on and around the line, a firm will determine what point is best and based on demands. o If a demand for one product is higher than the other, the linear line with a point closest to the product is ideal. Key Terms: Scarcity wants are unlimited, resources are limited o Resources include tangible and intangible things, such as money, products, or time. Economics the choice that consumers, business managers, and government officials make to attain goals given their scarce resources. Marginal Analysis Analysis that involves comparing marginal benefits (MB) and marginal costs (MC). o “marginal,” to economists, means “extra” or “additional.” Tradeoffs because of scarcity, producing more than one good or service means producing less of another good or service Opportunity Cost highest valued alternative that must be given up to engage in an activity. Centrally Planned Economy an economy where the gov’t decides how economic resources will be affected. 3 Market Economy the decision of households and firms interacting in markets allocate economic resources. Mixed Economy an economy which most economic decisions result from the interaction of buyers and sellers in markets but in which the gov’t plays a significant role in the allocation for resources. Productive efficiency a good or service is produced at the lowest possible costs. Allocative Efficiency state of the economy in which production is in accordance with consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the MC (marginal cost) of producing it. Voluntary Exchange both the buyer and seller of a product are made better off by the transaction. Equity the fair distribution of economic benefits. o There is often a trade off between efficiency and equity Economic Variable something measureable that can have different values. Ex: the income of doctors, actors, authors, etc. Positive Analysis concerned with what is o Pos. Analysis can show the consequences of a policy, not if it’s “good” or “bad” Normative Analysis what ought to be Microeconomics study of how households and firms make choices, how they interact in markets, and how the gov’t attempts to influence their choices. Macroeconomics study of the economy as a whole, including topics like inflation, unemployment, and economic growth. 4 Chapter 2: Trade –offs, Comparative Advantage, and the Market System Production Possibilities Frontier (PPF) a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. A PPF graph shows the tradeoffs of one product over another or an opportunity cost. This graph shows Tesla’s production choices at a certain plant. We want an ideal point to be both efficient and attainable, meaning that all the resources are available and they are being used fully. 5 All points on the curve are attainable and efficient. All points above the curve are unattainable. All points below the curve are inefficient. As point F states, the combination is inefficient because the maximum output is not being utilized for the resources at hand. Point G is unattainable because there are not enough resources to obtain that number. The opportunity cost of this graph is producing more SUVs would mean that the company has to give up making Sedans with those resources. Straightline curves mean opportunity costs are constant. Increasing Marginal Opportunity Costs The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. When switching labors workers from one specialty to another, you’d take the best adaptable labor to produce something new. When you increase the labor even more, you take the 2 best adaptable laborers to produce the product. Over time, if increased exponentially, new laborers will eventually have no experience in creating the new product, therefore slowing down the rate of production. 6 This graph shows increasing marginal opportunity cost. Increasing automobile production by a given quantity requires larger and larger decreases in tank production. Economic Growth: The ability of the economy to increase the production of goods and services. The resources available to any economy at any given time are fixed. Technological change makes it possible to produce more goods without the number of workers or machinery changing, creating a growth. Comparative Advantage Looks at comparing opportunity costs between different individuals. The one with the lower opportunity cost has the advantage. 7 Someone with an absolute advantage can produce more of a good or service than competitors using the same amount of resources. This means that someone can, for example, pick more apples than you in a given amount of time. They pick more and therefore have the advantage. Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower cost than competitors. *Even if a competitor does not have the absolute advantage over another group, they can still have the comparative advantage because their opportunity cost is lower and their gain is higher on their PPF. The basis for trade is comparative advantage, not absolute advantage. A producer will specialize in the activity that they have the highest advantage in. If someone is the fastest apple picker but they have a comparative advantage in another activity, like picking cherries, then that competitor will specialize in that activity and trade with others for apples. The Market System 1. Market: a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Product Market: markets for goods, like computers, or services, like medical treatment. Factor Market: A market for the factors of production, like labor, capital, natural resources, and entrepreneurial ability. Factors of Production: The inputs used to make goods and services. Circular Flow Diagram: A model that illustrates how participants in markets are linked. 8 Households and firms are linked together in a circular flow of production, income, and spending. This does not include government spending or banks, stocks, or parts of the financial system, or that some good purchased are imported from other countries. Free Market: a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed. Prices must be flexible in a market. Changes in relative prices, or the prices of one good or service relative to the prices of other goods or services, provide a signal to the consumers and the firms. 2. Entrepreneur: Someone who operates a business, bringing together the factors of productions, or labor, capital, and natural resources, to produce goods and services. Entrepreneurs think of products their consumers might not even realize they want or need. They make new products. They contribute greatly to economic growth. Property Rights: The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. Property can be tangible, like watches or water bottles, or intangible, like an idea. Intellectual and copyrights are also included. *Textbook Used: Hubbard, R. Glenn, and Anthony Patrick O'Brien. Microeconomics, 5th Edition. Print. Pearson Education. 9
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