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EC 111 Ch 1 Notes

by: Allison Ernst

EC 111 Ch 1 Notes Econ 111-006

Allison Ernst
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Ch 1
Class Notes
EC 111




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This 4 page Class Notes was uploaded by Allison Ernst on Tuesday January 26, 2016. The Class Notes belongs to Econ 111-006 at University of Alabama - Tuscaloosa taught by Zirlott in Winter 2016. Since its upload, it has received 39 views. For similar materials see Macroeconomics in Economcs at University of Alabama - Tuscaloosa.

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Date Created: 01/26/16
Highlight = Important Principle Highlight = Important Concept Highlight = Key Term Chapter #1 Ten Principles of Economics What Economics Is All About - Scarcity- The limited nature of society’s resources - Society has limited resources and therefore can’t produce all the goods and services people wish to have - Economics- The study of how society manages its scarce resources - How people make decisions Ex: What they buy/how much they save - How people interact with one another Ex: Examine how both buyers and sellers determine the price a good is sold at and the quantity sold - Analyze forces and trends that affect the economy as a whole Ex: Growth in average income/unemployment How People Make Decisions - Principle #1: People Face Trade -offs - Making decisions requires trading off one goal against another Ex: Choosing to buy new clothes leaves l ess money to spend on food - Trade-off: Guns vs. Butter -The more society spends on national defense (guns) for protection, the less it can spend on consumer goods (butter) to raise the standard of living - Efficiency- Society getting the most it can fro m its scarce resources - Equality- Distributing economic prosperity uniformly among the members of society Efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices - Trade-off: Efficiency vs. Equality -Government policies aimed at equalizing the distribution of economic well -being Ex: Welfare systems help those most in need; Income taxes ask the wealthy to contribute more than others to support the government. This increases equality, but reduces efficiency Redistributing income from the rich to poor ---reduces incentive to work---people work less—fewer goods/services are produced When the government tries to cut the economic pie into more equal slices, the pie gets smaller - Principle #2: The Cost of Something Is What You Give Up to Get It - Making decisions requires comparing the costs and benefits of alternative choices Ex: Deciding to go to college Benefits: Better job opportunities/education Costs: Tuition/time - Opportunity Cost- Whatever must be given up to obtain some item Ex: College athletes drop out of school to play professionally and earn millions decide the benefits of a college education is not worth the cost - Principle #3: Rational People Think at the Margin - Systematically and purposefully do the best they can to achieve their objectives, given the available opportunities - Make decisions by evaluating costs and benefits of Marginal Changes- incremental adjustments to an existing plan Highlight = Important Principle Highlight = Important Concept Highlight = Key Term Ex: When a student considers going to college for an extra year, he/she compares the fees and foregone wages to the extra income that could be earned with the extra year of education - Principle #4: People Respond to Incentives - Incentive- Something that induces a person to ac t; the prospect of a reward or punishment Ex: When gas prices rise, consumers buy more hybrid cars and fewer SUVs - Rational people respond to incentives How People Interact - Principle #5: Trade Can Make Everyone Better Off - Instead of being self-sufficient, people can specialize in producing one good/service and exchange it for other goods - Countries also benefit from trade and specialization: -Get a better price abroad for goods they produce -Buy other goods more cheaply from abroad than could be produced at h ome - Principle #6: Markets Are Usually A Good Way to Organize Economic Activity - Market- A group of buyers and sellers (need not be in a single location) - “Organize economic activity” means determining: -What goods to produce -How to produce them -How much of each to produce -Who gets them - Market Economy- Allocates resources through the decentralized decisions of many households and firms as they interact in markets for goods and services - The invisible hand works through the price system: -The interaction of buyers and sellers determines prices -Each price reflects the good’s value to buyers and the cost of producing the good -Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well -being Ex: Everyone wants Apple products ---Apple hires more workers ---creates new items - Principle #7: Governments Can Sometimes Improve Market Outcomes - Important role for government: enforce property rights (police, courts) - Property Rights- the ability of an individual to own and exercise control over scarce resources People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen - Market Failure- When the market fails to allocate society’s resources efficiently Causes: Externalities- The impact of one person’s actions on the well -being of a bystander Ex: Pollution—the production of a good pollutes the air and creates health problems for those who live near the factories Market Power- The ability of a single buyer/sel ler to have a substantial influence on market prices Ex: Laws restricting monopolies - In such cases, public policy may promote efficiency - Government may alter market outcome to promote equity (equality) If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided Highlight = Important Principle Highlight = Important Concept Highlight = Key Term How the Economy as a Whole Works - Principle #8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services - The most important determinant of living standards: productivity - Productivity- The amount of goods and services produced per unit of labor -Depends on the equipment, skills, and technology available to workers -Other factors (labor unions, competition from abroad) have far less impact on l iving standards - To boost living standards, policymakers need to raise productivity by ensuring that workers are well educated, have the tools they need to produce goods and services, and have access to the best available technology - Principle #9: Prices Ri se When the Government Prints Too Much Money - Inflation- An increase in the overall level of prices in the economy Ex: 1921, newspaper in Germany costs 0.30 marks; 1922, same newspaper costs 70,000,000 marks (all other prices in the economy rose similarly) - 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 - The faster the government creates money, the greater the inflation rate - Principle #10: Society Faces A Short -Run Tradeoff Between Inflation and Unemployment - In the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions - Other factors can make this tradeoff more or less favorable, but the tradeoff is always present - This short-run tradeoff plays a key role in the analysis of the Business Cycle- Fluctuations in economic activity, such as employment and production


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