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Chapter 1 Notes

by: Sarah Smithson

Chapter 1 Notes 106

Sarah Smithson
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About this Document

First week of class, chapter 1
Introductory Microeconomics
David Van Der Goes
Class Notes




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This 5 page Class Notes was uploaded by Sarah Smithson on Sunday January 24, 2016. The Class Notes belongs to 106 at University of New Mexico taught by David Van Der Goes in Spring 2016. Since its upload, it has received 19 views. For similar materials see Introductory Microeconomics in Economcs at University of New Mexico.


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Date Created: 01/24/16
Chapter 1 Notes Basic truth of economics • To attain our goals, we have to make choices ◦ We live in a world of scarce resources ◦ Wants are unlimited, resources aren’t Economics: The study of the choices consumers, business managers, and government officials make to attain their goals, given scarce resources. Scarcity: Unlimited wants exceed limited resources Assumptions made by economists • People are rational • People respond to economic incentives • Optimal decisions are made at the margin Three questions every economy must answer • What goods and services will be produced? • How will the goods and services be produced? • Who will receive the goods and services produced? Economic Models: A simplified version of reality used to analyze real world economic situations. Market: A group of buyers or sellers of a good or service and the institution or arrangement by which they come together to trade Three Key Economic Ideas: • People are rational ◦ Consumers and firms will use all available information as they act to achieve their goals ◦ Weigh pros and cons • People respond to economic incentives • Optimal decisions are made at the margin ◦ Marginal: Extra/Additional ◦ Best decisions are made when marginal benefit=marginal cost ◦ MB=MC Marginal Analysis: Comparing marginal benefits and marginal cost The Economic Problem • We live in a world of scarcity—> society faces the economic problem of limited resources ◦ Can only produce a limited amount Trade-offs: Producing more of one good or service means producing less of another good or service • The best measure of the cost of producing one good or service is the value of what has to be given up to produce it Opportunity Cost: The highest valued alternative that must be given up to engage in an activity • Trade offs force society to make choices when answering the following three fundamental questions ◦ What goods and services will be produced? ◦ How will the goods and services be produced? ◦ Who will receive the goods and services produced? Centrally Planned Economies versus Market Economies • To answer the three main questions, two main economic structures are used by societies ◦ Centrally Planned Economy ▪ The government decides how economic resources will be allocated ▪ Soviet Union ▪ Not successful at producing low cost, high quality goods and services ▪ Political dictatorship ▪ North Korea ▪ China ◦ Market Economy ▪ The decisions of households and firms interacting in markets allocate economic resources ▪ High income democracies ▪ US ▪ Japan ▪ Canada ▪ Western Europe ▪ Consumers decide what goods/services are produced The Modern “Mixed” Economy Mixed Economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. • Social services are provided by government ◦ Social security 2 ◦ Medicare/Medicaid ◦ Minimum wage Efficiency and Equity • Two types of efficiency ◦ Productive efficiency occurs when a good or service is produced at the lowest possible cost ◦ Allocative efficiency occurs when production is in accordance with consumer preferences (MB=MC) • Markets tend to be efficient because they ◦ Promote competition ◦ Facilitate voluntary exchange • Voluntary exchange ◦ Both buyer and seller are made better off by the transaction • Some people prefer fairness or equity over efficiency Equity: The fair distribution of economic benefits • Governments often have to regulate between efficiency and equity Economic Models • Economists rely on economic theories/models (interchangeable) • Used to analyze real world issues • Simplified version of reality • Sometimes economists use a model to analyze an issue • Have to develop new models ◦ What assumptions are being used? ◦ Formulate a testable hypothesis ◦ Use economic data to test hypothesis ◦ Revise model is failure ◦ Retain revised model to help answer similar future questions The Role of Assumptions in Economic Models • Any model is based on making assumptions • Model has to be simplified to be useful • Can’t analyze an economic issue unless we reduce its complexity • Behavioral assumptions ◦ Motives of consumers and firms ◦ Assume that goods and services will be bought that will maximize well-being/satisfaction ◦ Firms act to maximize profits Forming and Testing Hypotheses in Economic Models 3 Economic Variable: something measurable that can have different values • In an economic model, a hypothesis is a statement that may be either correct or incorrect about an economic variable • Hypothesis must be tested before it is accepted • Should not be value judgements • Economic models are used if it leads to hypotheses that are confirmed by statistical analysis Positive Analysis: Analysis of what is Normative Analysis: Analysis concerns with what ought to be Microeconomics and Macroeconomics Microeconomics: The study of how households and firms make choices based on scarce resources, how they interact in markets, and how the government attempts to influence their choices. • Explains how consumers react to changes in product prices • How firms decide what prices to charge for the products they sell Macroeconomics: The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. • Recession and unemployment • Economic growth and recessions • Policy issues Preview of Important Economic Terms Firm, company, or business: An organization that produces a good/service (used interchangeably) Entrepreneur: Someone who operates a business Innovation: The practical application of an invention Technology: A firms process to produce goods and services Goods: Tangible merchandise Services: Activities done for others Revenue: Total amount received for selling a good or service (price per unit x number of units sold) Profit: The difference between revenue and cost Household: All persons occupying a home Factors of Production, Economic Resources, Inputs: Firms use factors of production to produce goods and services. 4 Land, labor, capital, natural resources, entrepreneurial ability Capital: Financial or physical. Financial capital: stocks, bonds, bank accounts, money holdings. Physical capital: manufactured goods used to produce other goods and services Human Capital: Accumulated training and skills workers possess. To learn more and get OneNote, visit 5


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