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Week 2 Notes

by: Michael Notetaker

Week 2 Notes ECON103011

Michael Notetaker
GPA 3.895

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About this Document

Covers Chapter 1 appendix, chapter 2, and part of chapter 3
Professor Abrams
Class Notes
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This 4 page Class Notes was uploaded by Michael Notetaker on Thursday February 18, 2016. The Class Notes belongs to ECON103011 at University of Delaware taught by Professor Abrams in Winter 2016. Since its upload, it has received 34 views. For similar materials see Macroeconomics in Economcs at University of Delaware.


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Date Created: 02/18/16
Week 2 Notes Chapter 1 Appendix • Direct/positive relationship-both variables move in the same direction • Inverse/negative relationship-two variables move in the opposite direction • Slope-rise divided by run • Y=a + bx where a is the vertical intercept and b is the slope • Slope of zero-horizontal line • Slope of infinity-vertical line Chapter 2 • Economics system-a particular set of institutional arrangements and a coordinating mechanism o Laissez-faire capitalism-government intervention is very minimal and markets and prices are allowed to direct all economic activity § Governments role is limited to protecting private property from theft and establishing a legal environment in which contracts are enforced § Believes that government intervention will lead to corruption o Command systems-governments have total control over all economic activity § Also called communism or socialism § Central planning board appointed by government makes all decisions § Government owns all businesses o Market system-a blend of laissez-faire and command system, some government intervention takes place § Mix of government initiatives and individuals seeking economic growth through their own business decisions, resulting in competition among producers § Defined by the market as the dominant force in the economy • Private property-extensive private ownership of capital, encourages investments, innovation, exchange, maintenance of property, and economic growth • Freedom of enterprise-entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods/services to sell them in their chosen markets • Freedom of choice-enables owners to employ or dispose of their property and money as they see fit • Self-interest-the motivating force of various economic units as they express their free choice • Competition-comes from freedom of enterprise and choice that allows the market system to function o Two or more buyers and sellers acting independently allows no single buyer or firm to dictate price o Freedom of entry or exit into industry allows for adjustments to demand • Market-institution that brings together buyers and sellers • Specialization-using resources of an individual, firm, region, or nation to produce one or a few goods/services rather than an entire range of goods/services o Division of labor-specialization makes use of different abilities, fosters learning by doing, saves time, and increases efficiency of society • Medium of exchange-makes trade easier through the use of money • Barter-swapping goods for other goods • Money-convenient social invention to facilitate exchange of goods and services • Five Fundamental Questions o Goods that continue to make profits will be produced § Profits=total revenue – total costs § Consumer sovereignty-crucial in determining the types and quantity of goods produced § Dollar votes-registry of wants of goods by consumers purchases o Goods will be produced in the most cost-efficient way § Correct mix of labor and capital § Cost of production depends on available technology and prices of resources which helps determine the technique of production o Goods will be bought by the consumers who are willing (maximum willingness-to-pay exceeds price) and able o Markets are dynamic and will adjust to changes in demand by allocating more or less resources to the good (ex. consumers desire more fruit- resources from other goods such as vegetables will switch from those goods to fruits) o Technological advances allow one firm to gain a competitive advantage and gain more profits § Creative destruction-the creation of new products and production methods completely destroy the market positions of firms that are wedded to existing products and methods (ex. cassettes to CD’s to IPods) • Dollar votes accumulated by a firm promotes firm’s capital goods which lead to economic growth • Invisible hand-the underlying competition between consumers and producers that promotes the public/social interest and balances the market system o Efficiency-forces most efficient production to lower total costs o Incentives-greater risk and effort taken by firms leads to greater profits o Freedom-market system freedom of enterprise and choice, free entry and exit into industry • Coordination problem-too difficult for command system to make the millions of decisions consumers and producers make in the market system • Incentive problem-firms in command system have no incentive to gain an edge on other firms (because there aren’t any) so technological advances lack and cost of production does not drop (similar to monopoly) • Circular flow diagram-illustrates the repetitive flow of goods/services, resources, and money for a simplified economy with no government o Households-one or more persons occupying a housing unit o Businesses-commercial establishment that attempts to earn profit by offering goods/services § Sole proprietorship-a business that is owned and managed by one person § Partnership-two or more individuals that own and manage a business with agreement on business decisions § Corporation-an independent legal entity that can acquire resources, own assets, produce and sell goods, incur debt, extend credit, and sue/be sued o Product market-the place goods/services are bought and sold o Resource market-households sell resources to businesses • Profit system-the guide for businesses to make profits • Only owners, in the market system, are liable for risk and loosing money Chapter 3 • Demand-schedule that shows the amount consumers are willing and able to purchase at a given price • Law of demand-other-things-equal, as price falls, the quantity demanded increases • Determinants of demand-things that shift demand curve, TRIBE o Taste preference-consumers will consume more of a product if the newspaper publishes an article saying how good it is for you o Related goods § Complementary goods-goods that are used conjointly, as price of complementary goods fall, specific good demand increases § Substitute goods-goods that are used instead, as prices of substitute goods falls, demand for specific goods falls o Income § Inferior goods-cheap goods, as income falls, demand for specific good increases (ex. Raman noodles) § Normal goods-most goods, as income rises, demand for specific good increases (ex. Mercedes) o Buyers-if there is an influx of new buyers, the demand for specific good will increase (ex. baby boom increased demand for baby food) o Expectations-consumers expectations of future prices, if the expectation is that prices for homes will rises in the future, the demand for houses now will increase • Supply-schedule that shows the amount of supply producers are willing and able to produce at a specific price • Law of Supply-other-things-equal, as price rises, the quantity supplied rises o Price acts as an incentive for producers o At some point costs will rise-more production means higher cost of production o Supply curve=marginal cost curve o Prices are the only thing that changes the quantity supplied, movement along curve o Change in supply shifts curve • Determinants of supply-things that shift supply curve, ROTTEN o Resources price-increase in cost of production, decreases profit and decreases supply o Other prices goods-if the price of another good that the producers is able to produce with the same resources increases, the demand for the specific good will decrease (ex. if the price of watermelon goes up, farmers will use there land to produce watermelon instead of cucumbers) o Taxes and subsidies-taxes increase the cost of production and decrease supply, increase in subsidies (money paid to producer by government) decreases cost of production and increases supply o Technology-technological advancement makes production more efficient decreasing cost of production and increases supply o Expectations of producers-the expectation of a price increase in cars in the future will decrease the supply of cars presently o Number of sellers-an increase in the number of sellers will increase the supply


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