EC 111 Week 1 Notes
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This 2 page Class Notes was uploaded by Matt Cutler on Wednesday January 20, 2016. The Class Notes belongs to at University of Alabama - Tuscaloosa taught by in Summer 2015. Since its upload, it has received 57 views.
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Date Created: 01/20/16
Macroeconomics Intro Monday, January 4, 2016 4:35 PM • Scarcity: the limited nature of society's resources (nothing on this planet is infinite) • Economics: the study of how society manages its scarce resources I. How people make decisions a. Principle #1: People Face Tradeoffs i. All decisions face tradeoffs, Ex: 1) Going to a party the night before your midterm leaves less time for studying. 2) Having more money to buy stuff requires working longer hours, which leaves less time for leisure 3) Protecting the environment requires resources that could be otherwise used to produce consumer goods. ii. Efficiency vs. equality 1) Efficiency: when society gets the most from its scarce resources 2) Equality: when prosperity is distributed uniformly among society's members Tradeoff: to achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic "pie" b. Principle #2: The cost of something is What You Give Up to Get It (Opportunity Costs) i. Making decisions requires comparing the costs and benefits of alternative choices ii. The OpportunityCost of any item is whatever must be given up to obtain it. iii. It is relevant cost for decision making iv. Examples: The Opportunity cost of… 1) Going to college for a year is not just tuition, books, and fees, but also the forgone wages. c. Principle #3: Rational People Think at the Margin i. Rational People 1) Systematically and purposefully do the best they can to achieve their objectives 2) Make decisions by evaluating costs and benefits of marginal changes- incremental adjustments to an existing plan. It's not always black and white… Ex: people would not smoke, drink, or have unprotected sex if it were this simple. d. Principle #4: People Respond to Incentives i. Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment ii. Rational people respond to incentives 1) Ex: when gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs. e. Principle #5: Trade Can Make Everyone Better Off (Specialization) i. Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. ii. Countries also benefit from trade & specialization: 1) Get a better price abroad for goods they produce 2) Buy other goods more cheaply from abroad than could be produced at home f. Principle #6: Markets are Usually A Good Way to Organize Economic Activity i. Market: a group of buyers and sellers (need not be in a single location) ii. "Organize Economic Activity" means determining 1) What goods to produce 2) How to produce them 3) How much of each to produce 4) Who gets them g. Principle #6: Markets are Usually A Good Way to Organize Economic Activity i. A market economy allocates resources through the decisions of many households and firms as they interact in markets. ii. The Invisible Hand (Adam Smith) works through the price system: 1) The interaction of buyers and sellers determines prices. 2) Each price reflects the good's value to buyers and the cost of producing the good 3) Prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being. h. Principle #7: Governments Can Sometimes Improve Market Outcomes i. Important role for govt: Enforce Property Rights (with police, courts) ii. People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen. iii. Market failure: when the market fails to allocate society's resources efficiently iv. Causes: 1) Externalities, when the production or consumption of a good affects bystanders (i.e. pollution) 2) Market Power, a single buyer or seller has substantial influence on market price (i.e. EC 111 Page 1 2) Market Power, a single buyer or seller has substantial influence on market price (i.e. monopoly) v. In such cases, public policy may promote efficiency vi. Govt may alter market outcome to promote equity (equality) vii. If the market's distribution of economic well-being is not desirable, tax or welfare policies can change how the economic "pie" is divided. i. Principle #8: A country's standard of living depends on its ability to produce goods and services. (Gross Domestic Product; GDP) i. The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor ii. Productivity depends on the equipment, skills, and technology available to workers. iii. Other factors (i.e. labor unions, competition from abroad) have far less impact on living standards. j. Principle #9: Prices rise when the government prints too much money. i. Inflation: increases in the general level of prices 1) In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. 2) The faster the govt creates money, the greater the inflation rate. k. Principle #10: Society faces a short-run tradeoff between inflation and unemployment i. In the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions. ii. Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. EC 111 Page 2
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