Economics 111 Chapter 1 Notes
Economics 111 Chapter 1 Notes EC 111
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This 5 page Class Notes was uploaded by Carter Cox on Monday January 25, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 81 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 01/25/16
What Economics Is All About Chapter 1 the limited nature of society s resources the study of how society manages its scarce resources How people decide what to buy how much to work save and spend How rms decide how much to produce how many workers to hire How society decides how to divide its resources between national defense consumer goods protecting the environment and other needs Principle 1 People Face Tradeoffs All Decisions involve tradeoffs Examples Going to a party the night before your midterm leaves less time for studying Having more money to buy stuff requires working longer hours which leaves less time for leisure Protecting the environment requires resources that could otherwise be used to produce consumer goods Society faces an important tradeoff Efficiency VS Equality When society gets the most from its scarce resources When prosperity is distributed uniformly among society s members Every one gets an equal share 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 quotpiequot Principle 2 The Cost of Something Is What You Give Up to Get It Making decisions requires comparing the costs and bene ts of alternative choices The Opportunity Cost OP of any item is whatever must be given up to obtain it 0 OP cost of decisionmaking EX College Tradeoff is working It is the relevant cost for decision making Examples The opportunity cost of going to college for a year is not just the tuition books and fees but also the foregone wages Seeing a movie is not just the price of the ticket but the value of the time you spend in the theater Principle 3 Rational People Think at the Margin Rational People Systematically and purposefully do the best they can to achieve their objectives Make decisions by evaluating costs and bene ts of marginal changes incremental adjustments to an existing plan We assume people are rational It is not always black and white 0 Donating to Charity 0 Going to Auburn o Unprotected Sex Examples When a student considers whether to go to college for an additional year her compares the fees and forgone wages to the extra income he could earn with the extra year of education When a manager considers whether to increase output she compares the cost of the needed labor and material to the extra revenue Principle 4 People Respond to Incentives Incentive something that induces a person to act ie the prospect of a reward or punishment 0 Going to the NFL to get millions of dollars Rational People respond to incentives Examples When gas prices rise consumers buy more hybrid cars and fewer gas guzzling SUVs When cigarette taxes increase smoking fall What is the incentive for having a playoff system in college football Money and Ratings Principle 5 Trade Can Make Everyone Better Off Rather than being self sufficient people can specialize in producing one good or service and exchange it for other goods Countries also bene t from trade and specialization you do what you do best 0 Get a better price abroad for goods they produce Buy at a cheaper price 0 Buy other goods more cheaply from abroad than could be produced at home Principle 6 Markets Are Usually A Good Way to Organize Economic Activity A group of buyers and sellers need not be in a single location 0 Example lnternet Stock Exchange quotOrganize Economic Activityquot means determining o What goods to produce 0 How to produce them 0 How much of each to produce 0 Who get them Organize Economic Activity demand avaibilty income necessity want allocates resources through the decisions of many households and rms as they interact in markets 0 Circular Flow Diagram The works through the price system 0 Created by Adam Smith 0 The interaction of buyers and sellers determines pdces 0 Each price re ects the good s value to buyers and the cost of producing the good 0 Prices guide self interested looking out for yourself household s and rms to make decisions that in many cases maximize society s economic well being Examples Apple People buying more thins leads to more jobs Principle 7 Governments Can Sometimes Improve Market Outcomes with police courts People are less inclined to work produce invest or purchase if large risk of their property being stolen Examples Walking Dead and The Purge both have no governments Survival of the Fittest Market Failure When the market fails to allocate society s resources efficiently Causes 0 Externalities When the production or consumption of a good affects bystanders pollution from cars 0 Market Power a single buyer or seller has substantial in uence on market price monopolies They want competition because its how we get lower prices In such cases public policy may promote efficiency 0 EPA Laws Laws against monopolies Example Rite merging with Walgreens Government may alter market outcome to promote equity If the market s distribution of economic well being is not desirable tax welfare polices can change how the economic quotPiequot is divided Principle 8 A country s standard of living depends on its ability to produce goods and services The most important determinant of living standards the amount of goods and services produced per unit of labor Productivity depends on the equipment skills and technology available to workers Other Factors labor unions competition from abroad have far less impact on living standards GDP How much it can produce 0 All have equipment skill technology and workers 0 Example Internet railroads plants school systems Africa Extremely rich in natural resources raw materials but they don t have equipment resources Principle 9 Prices rise when the government prints too much money In ation increases in the general level of prices 0 Rising prices In the long run in ation is almost always caused by excessive growth in the quantity of money which causes the value of money to fall The faster the government creates money the greater the in ation rate Principle 10 Society faces a short run tradeoff between in ation and unemployment Philips Curve IN the short run 12 years many economic policies push in ation and unemployment in opposite directions Other factors can make this tradeoff more or less favorable but the tradeoff is always present 0 Higher price lower unployment
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