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by: Kimberly Clemens

Microeconomics ECON 1201

Kimberly Clemens
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Chapters 1 & 2 Cover the basics of Economics and introduces Trade-offs, Comparative Advantage, and the Market System.
Owen Svalestad
Class Notes
Economics, Microeconomics, Basic Microeconomics, Microecon, UCONN, Hubbard and OBrien




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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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