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Econ 201, Week 2

by: Marcus Itaro

Econ 201, Week 2 ECON 201

Marcus Itaro
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About this Document

Overview of Intro II and Intro III, along with some graphs for academic clarification. Enjoy.
Dr. Ken Baker
Class Notes




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This 7 page Class Notes was uploaded by Marcus Itaro on Sunday January 31, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Dr. Ken Baker in Summer 2015. Since its upload, it has received 44 views. For similar materials see in Economcs at University of Tennessee - Knoxville.


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Date Created: 01/31/16
Econ 201: Intro II and Intro III *Key terms of the lecture are in bold and italicized* Intro II: The Economic Framework Benefits, Costs, and Incentives Opportunity Cost is the value of the next-best foregone opportunity whenever a decision is made. Example: A college student going to a movie. (Cost is $10 for the ticket; Opportunity Cost is two hours of study time, or hanging out with other friends) Margins Margin means one more, or the next one, or one additional:  “How do I spend the next hour?”  “Do I want to buy one more video game?”  “Do I want to take more or less hours this semester?” Marginal Benefits and Marginal Costs are generally considered in decision- making, rather than total benefits or costs. If the Marginal Benefit outweighs the Marginal Cost, agree (say yes) If the Marginal Cost outweighs the Marginal Cost, disagree (say no) Incentives *Example derived from lecture solely for academic clarity* “Assume:  You hire a real estate agent to help sell your home  He/She makes 3% of the final sale You can: 1. Sell the house now for $250,000 (Agent earns $7,500) OR 2. Sell the house in 3 months for $300,000 (Agent earns $9,000)  The Marginal Benefit from waiting is $50,000  The Marginal Benefit to the real estate agent from waiting is $1,500 Production Possibilities Frontier (PPF) Model PPF is a model in economics that shows combinations of goods and services that can be maximized and produced given available resources and technology. When graphing, the PPF (the blue line shown below) is represented as a line that connects all the maximum possibilities. Efficient Points are all points that lie on the PPF; all available resources are used to their best effect. Inefficient Points are all points that lie inside the PPF; not all resources are used, more can be done. Unattainable Points are all points that lie outside the PPF; there are not enough resources available to attain these goals, due to scarcity. *In order to produce more of one good, you have to forego more and more of the other product. This principle is known in Economics as the Law of Increasing Opportunity Cost* Technological Advancements have the potential of shifting the PPF in relation to one good and not the other, resulting in a sort of skew in the line. PPF’s can be linear or curved; on curved PPF’s, Economic Growth is symbolized by an outward shift in the PPF line. Capital Goods are physical capital that will help produce more consumer goods in the future, such as equipment. Consumer Goods are goods/services that people like to consume today, such as food, clothes, cars, etc. Intro III: Economic Systems The Circular Flow Model Labor/Other Inputs Factor Markets Where wage is determined Pay Firms/Producers Where prices of Goods/Services are determined Household Spending Goods/Services Measuring Output Output and production comes in units (tons of rubber, pounds of uranium, etc.). These units cannot be translated into statistics, so the final result is converted into market value, or what the product sells for. This number is known as the GDP (Gross Domestic Product), and represents the total value of a country’s annual production. Standard of Living & Economic Well-Being Economists measure Economic Well-Being as the Standard of Living  “Richer” countries have a higher standard of living because the GDP per person is higher, and vice versa for “poorer” countries Standard of Living = GDP/Population Overview of the U.S. Economy The 3 largest county by geography, the United States contains about 7% of the Earth’s total land rd The 3 most populous country, the United States contains less than 5% of the world population The United States produces between 20%-25% of the world’s entire output, making it the largest economy in the world The U.S. economy is 150x larger today than 1930; the population is 2.5x larger than 1930 Economic Systems An Economic System consists of the organization and methods used by a society to provide for its people  What goods/services to produce  How said goods/services are produced  How to split these goods/services amongst members of society *These are known as the “three questions”* There are three main economic systems: Traditional Economies, Command Economies, Market Economies Most nations’ economies function through some mix of all three Traditional Economy As the name suggests, the traditional economy follows the ways of the past. Pros: Less conflict in society as a result of understood and accepted societal roles, and a high sense of community Cons: Lack of individual freedom, slow(or no) economic growth, slow(or no) progress in standard of living, slow(or no) technology advancement Command Economy This type of economy answers to a central authority figure, such as a leader or dictator. Central planners handle the intricacies of the economy from production to allocation of goods/services. Command economies generally have many committees Pros: Change can occur quickly without debate, economic security is provided to all citizens, equal distribution of wealth and resources Cons: Easily corruptible, surpluses/shortages of goods/services, quality suffers Market Economy This type of economy utilizes markets and the price system to answer the three questions. Economy is sustained mostly by interactions of countless individuals Pros: Faster economic growth, higher standard of living, larger variety of goods/services, most production, better quality Cons: Markets can fail from various causes, uneven distribution of wealth and resources, possible misallocation of resources for production Adam Smith and the Invisible Hand Adam Smith, the author of An Inquiry into the Nature and Causes of the Wealth of Nations, is known as the “father of modern economics” One of his most recognized ideas is the “power of everyone’s individual self- interest to somehow guide the economy to utilize its resources in the most efficient way possible.” The –isms Capitalism Capitalist systems have no state planning of economic activity Resources are privately-owned and controlled No plan of how to allocate goods/services Capitalism focuses on private self-interest Pros: Economic efficiency, economic freedom Cons: Natural tendency towards uneven wealth/resource distribution, chance of market failure Karl Marx Supporter of socialism and communism Strongly opposed capitalism and its associated greed; believed capitalism was self-destructive and unstable by nature Authored Communist Manifesto and Das Kapital Capitalism’s End Capitalism divides people into two groups: 1. Capitalists who own the factories, receive the profits, and employ workers AND 2. Workers who are paid in wages Marx believed only capitalists truly benefit from the economy, continuously exploiting the workers and gaining wealth until the workers finally revolt Socialism Socialist systems generally have a central authority figure allocating goods/services There is usually a high level of state involvement in the economy Resources are partly private, partly owned by the state Socialism focuses on public interest Pros: Economic freedom, equal distribution of wealth and resources Cons: Less efficient


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