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Econ 201 Microeconomics Chapter 2

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by: Elshadai Smith-Mensah

Econ 201 Microeconomics Chapter 2 ECON 201

Marketplace > University of Louisville > Economcs > ECON 201 > Econ 201 Microeconomics Chapter 2
Elshadai Smith-Mensah
U of L
GPA 3.96

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Chapter 2 of Microeconomics with Lynn Usher
Principles of Economics: Microeconomics
Lynn Usher
Class Notes
Microeconomics, Economics
25 ?




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This 3 page Class Notes was uploaded by Elshadai Smith-Mensah on Monday February 22, 2016. The Class Notes belongs to ECON 201 at University of Louisville taught by Lynn Usher in Spring 2016. Since its upload, it has received 54 views. For similar materials see Principles of Economics: Microeconomics in Economcs at University of Louisville.


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Date Created: 02/22/16
Microeconomics CH2 1/12/2016 Microeconomics Chapter 2 Some tools of the Economist I. Opportunity cost- there’s no such thing as a free lunch. Assign a dollar amount if possible. II. ‘Trade’ creates value- when individuals make a choice to engage in a voluntary exchange…both parties are made better off. - Cash: traded for a good or service. - Barter: trade a good or service for a good or service - Transaction costs: time, effort to search out and negotiate an exchange reduction in these costs increases gains from trade. Internet- trade increases…made faster, easier - Middlemen- add value but increase cost- provide information, make arrangements for buyers and sellers (grocers, publishers, realtors, auto dealers, etc.)… increase efficiency III. Private property rights A. Definition: the right to… 1. Use and control a good or service 2. Legal protection from others 3. Transfer to another - Selling your organs in a violation of federal law. eBay intervened when a person put one of his kidneys up for sale. B. Give ‘Incentive to “make choices to… 1. Care for and properly manage efficiently 2. Conserve for the future- wanting something to last 3. Use in a way, develop things, that others value (property near UofL) 4. Reduce chances that your property will cause damage to property of others. - Opposite: common property-multiple people simultaneously own- beaches, rivers, roads IV. Production possibilities curve (frontier) PPC or PPF A. Definition: A curve that outlines all possible combinations of total output that can be produced. - PPC displays many economic concepts including:  Making purposeful choices- each point is a choice  Economizing opportunity costs- considered when moving along.  Trade-considered when specializing.  Property rights- efficient use/non efficient use. B. 3 basic assumptions along PPC 1. Fixed amount resources 2. Technology is constant 3. Efficient use of resources C. 2 types of PPC’s 1. Straight line PPC- non-specialized resources O.C. is constant as ‘move along PPC’ Ex: cookies 2. Bowed out PPC- specialized resources O.C. is not constant (changing) as move along PPC Ex. Farmer 1 Microeconomics CH2 D. Production combinations, points, not on PPC 1. Points below PPC…inefficient 2. Points above PPC….unattainable E. Shifting PPC Outward: 1. Increase in resource base- more or better Tools/skills, machinery, education 2. Advancement in technology- inventions/innovations (adopt new techniques) Entrepreneurs like Henry Ford, Bill Gates, Ray Kroc, and Steve Jobs 3. Giving up Leisure- work more hours, consider tax rates affecting worker motivation. 4. Improve rules of economy- laws/policies can increase output. Patents give private property rights to ideas. Corporations allowed- decreases costs to large businesses. Investment and production possibilities in the future. Investments vs consumptions. V. PPC’s: trade, output, and living standards A. Adam smith studied ‘Division of Labor’- PIN manufacturing plant. Specialization breaks down production into a series of specific tasks, each performed by different worker. 10 workers could produce 48000 vs 20 pins/day B. Specialization increases output 3 reasons 1. Individuals take advantage of their existing skills and specialize in whatever they do best. 2. Specialized workers become more skilled with time 3. Mass production is made possible Specialization- leads to larger scale production, better products and better methods of production. Notice: specialization necessitates trade Trade-countries learn from each other how to produce things. Human knowledge and ingenuity expand economic output in countries that allow international trade! C. David Ricard’s “Law of Comparative Advantage’ and specialization: “Total output is greatest when individuals (firms or regions) specialize in the production of goods (or services) in which they have a comparative advantage.” 1. Comparative advantage- ability of one to produce a good at a lower opportunity cost than others. (babysitting- others are good, while some are not) 2. Absolute advantage- ability of one to produce more of a good than others given the same amount of resources. (you cleaning the house vs 5 year old - Examples: empty dishwasher/type paper and lawyer/typist Use PPC display: - Comparative advantage - Specialization - mutual gains from trade 2 Microeconomics CH2 VI. Economic organizations - Trade and property rights are necessary and have a great outcome with the 3 basic economic questions a society must ask? Wwwww&h 1. What goods will be produced? 2. How will goods be produced? 3. For whom will goods be produced? - Two methods of org used to resolve econ questions: A. Market organization- allows unregulated prices and decentralized decisions of private property owners… also called capitalism B. Collective decision making- relies on public sector decision making… also called socialism. - Adam smith said let people figure out due to selfish needs. We have a combination. 3


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