Chapter 2 Tools of Economists
Chapter 2 Tools of Economists Eco2013
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This 3 page Class Notes was uploaded by Jessica Sanchez on Thursday January 28, 2016. The Class Notes belongs to Eco2013 at Florida State University taught by Joab Corey in Spring 2016. Since its upload, it has received 13 views. For similar materials see Principles of Macroeconomics in Economcs at Florida State University.
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Date Created: 01/28/16
ECO 2013 Notes January 19, 2016 Chapter 2: Tools Trade Creates Value Because the value of goods is subjective, voluntary trade creates value. Ex. The Candy game 1. When individuals engage in voluntary exchange, both parties are made better off. 2. Channeling goods and resources to those who value them most increases the wealth created by a society’s resources. Creation of Wealth The process by which some people become rich will make everybody richer, produce service or goods for other people. Ex. Henry Ford January 21, 2016 Importance of Property Rights Private property rights involve: 1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property 4 Incentives of Property Rights 1. Incentive to use resources in ways that are considered beneficial to others (what they value most) Ex. South Park: Cartmen’s Amusement Park Ex. Reselling your textbook 2. Private owners have incentive to care for and manage what they own Ex. Communal refrigerator vs. your own refrigerator 3. Private owners have an incentive to conserve for the future Ex. Tragedy of the Common Ex. Endangered species Zimbabwe, Botswana- gave people private property rights to the elephants, incentive to care for elephant, increased the number of elephants. Kenya- made it illegal, made price of ivory increase, increased the benefits of poaching, decreased number of elephants. 4. Private owners have an incentive to make sure their property does not damage your property (decrease liability). Property Rights and Development Lack of property rights= lack of economic progress Production Possibilities Curve (PPC) PPC: outlines all possible combinations of total output that could be produced, assuming a: 1. Fixed amount of productive resources 2. Given amount of technical knowledge 3. Full and efficient use of resources (Graph in Folder) 4 Factors that Shift the PPC 1. A change in the economy’s resource base Investment- the purchase, construction, or development of resources - However, investment requires us to give up consumption goods Ex. Consider the two PPC (notebook) 2. Changes in technology Technology: the knowledge available in an economy at any given time. - Technology determines the amount of output we can generate without limited resources. Ex. Tanks and Buses 3. A change in the rules under which an economy functions Ex. Imposing trade barriers Ex. Eliminate the business franchise tax in West Virginia 4. Changes in work habits Ex. Working harder can shit curve outward Ex. Working less can shift curve inward Law of Comparative Advantage The total output of a group of individuals, entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost. Ex. Should Bill Gates wash his own dishes? Corn OC Cars OC U.S. 50 1/5 car 10 5 corn Japan 20 ¼ car 5 4 corn U.S. produces corn Japan produces cars - Trade 4.5 corn for 1 car Ex. How I Met Your Mother (Folder) Economic Organization Every economy faces three questions: 1. What will be produced? 2. How will it be produced? 3. For whom will it be produced? - Capitalism: A system of economic organization where: o Productive are owned privately o Goods and resources are allocated through market prices Market Organization: a method of organization in which private parties make their own plans and decisions with the guidance of market prices o Socialism: a system of economic organization where: o Ownership and control of the means of production rest with the state Resource allocation is determined by centralized planning Collective decision making: the method of organization that relies on public sector decision making to resolve basic economic questions Why capitalism tends to work: 1. Capitalism is similar to natural selection. It uses the idea of market efficiency 2. Socialism suffers from an information problem Review 1. 4 incentives of property rights 2. Point of PPC curve 3. 4 factors that shift PPC 4. Law of comparative advantage 5. 3 questions every economy faces 6. Capitalism Vs. Socialism
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