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Econ 101: Introduction and Chapter 1 Material

by: Bethany Darr

Econ 101: Introduction and Chapter 1 Material ECON 101

Marketplace > Iowa State University > Economics > ECON 101 > Econ 101 Introduction and Chapter 1 Material
Bethany Darr

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These notes cover our textbook's Introduction and Chapter 1 material
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This 3 page Class Notes was uploaded by Bethany Darr on Wednesday August 24, 2016. The Class Notes belongs to ECON 101 at Iowa State University taught by Oh in Fall 2016. Since its upload, it has received 5 views. For similar materials see Macroeconomics in Economics at Iowa State University.


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Date Created: 08/24/16
Introduction  Vocabulary Terms  ● Economy​: a system for regulating a society’s production, consumption, and use of  services and material goods  ● Economics: ​  the study/science of a society’s economy  ● Market economy​: the economic practice of having individuals of small firms make  production and consumption decisions rather than one, specific leader/group make the  decisions; no single authority; usually very successful in practice  ● Command economy​: an economic system under one authority; the one authority is in  charge of all economic decisions of a society’s marketplace; usually fails in practice  ● Invisible Hand​: a term to describe how one person’s goal/journey to self­success tends  to make society more successful, as well; one person is looking to benefit only  themselves, but many persons do this, which ultimately leads society, as a whole, to  success  ● Microeconomics​: the study of individuals and their impact in the marketplace based on  their economic/everyday decisions and interactions with others  ● Macroeconomics​: the economic study of the overall patterns of fluctuation in a society’s  marketplace  ● Market failure​: a term to describe the negative impacts of self­interest on a society’s  marketplace when the bad outweighs the good  ● Recession​: an unprofitable fluctuation in the marketplace; economic downturn  ● Economic growth​: the ability of a successful economy being able to produce additional  services and material goods  Other Introductory Notes  ● The US, compared to other countries, has a much higher standard of living  ● Proper economic analysis allows for us to determine the cause of a market failure and  thus prevent it from happening again in the future  ● Economies experience fluctuation constantly­­it’s never just “good” (profitable) or “bad”  (unprofitable) for years on years; there are successful periods, and periods of recession    Chapter 1: First Principles  Principles of Economics  1. There are shortages in our resources, so choices have to be made.  2. Opportunity Cost outweighs all other costs.  3. Consumers make most, if not all, decisions “at the margin”.  4. Incentives drive people’s decisions  5. Even trading can result in economic gain  6. Everything in life tends to move toward an equilibrium­­this is true for the economy, as  well.  7. For an economy to be successful, all goods and services need to be used in a way that is  adequate.  8. Efficiency is key­­and it’s natural.  9. When efficiency goals aren’t met by an economy, there are measures a government can  take in order to improve the situation for the society.  10. Expenditure for one = income for another; Spending and income are inversely related.  11. Recession and inflation are natural fluctuations, but more often than not, they are  preventable.  12. When rule, policies, and regulations are put in place by a society’s government, the  society’s economic behavior tends to reflect the change(s) made.   Vocabulary Terms  ● Economic interaction​: how one person’s choice affects another’s in the marketplace  ● Resource​: something used to make something else (eg. flour for bread); in the economy,  a resource is typically broader: land, labor, capital, and human capital  ● Scarcity​: the situation in which there is not enough of an item or service to meet the  wants of an entire society  ● Opportunity cost​: the worth of the alternative to getting the good or service that was  wanted (eg. I bought a concert ticket at 5AM for $20 cheaper at the cost of three extra  hours of sleep. My sleep was my opportunity cost.)  ● Marginal decision​: a choice determining how to allocate the amount of an activity done;  involves many trade­offs  ● Marginal analysis​: the study of marginal decisions   ● Interaction​: how choices affect other choices; often, the end result wasn’t what was  intended from a single choice, simply because of interaction  ● Trade​: supplying services and goods for other services and goods in return  ● Specialization​: a portion of trade in which individuals almost perfect their work in a  specific area to make production more efficient (eg. working in an assembly line)  ● Trade­off​: what’s given up for a desired good/service  ● Equity​: a situation in which every individual is awarded an equal item/opportunity  ● Equilibrium​: things are equal/even/moving at a steady pace; all incentives have been  taken advantage of, so no other opportunities exist ­­ no one can exploit an opportunity to  make themselves better off because there isn’t an opportunity to do so in the first place  Other Notes from Chapter 1  ● No matter what good or service is being provided, the business of doing so naturally  tends to follow the same basic rules/principles.  ● In a market economy, individual choice is influenced by others in society and producers’  choices (and vice versa).  ● It’s usually best to let individuals make decisions regarding the use of scarce resources.  However, sometimes, it is necessary for authoritative people/groups to step in.  ● Incentives often greatly influence decisions made by others. People tend to continue  responding to incentives until no longer available.  ○ This principle is what drives all economic predictions. Behaviors of consumers  aren’t likely to change unless there is an incentive to do so.  ● Usually, dividing the work of production and service between many people for their  wants/needs is more successful than trying to be self­sufficient. (“Gains from trade.”)  ● An economy’s “Success” is measured by people’s happiness (not monetarily)  ● An economy is considered “efficient” if people are made better off ​not​ at the expense of  others’ well­being  ○ This rarely happens because it’s hard to become better off without making  someone else worse off. So, the real definition of economic efficiency is that all  possibilities to enhance the well­being of a society without harming individuals  have been tried.  ○ Efficiency and equity are inversely related. As efficiency increases, equity  decreases.   ● There are 3 main reasons for Market Failure:  ○ Not all possible outcomes of choices are taken into consideration (and one of the  outcomes not thought of played out)  ○ Greed  ○ Some goods simply can’t be managed in an efficient way  ● Some examples of governmental policies/actions that can affect society’s spending would  be:  ○ Military expenditures by the government  ○ Education expenditures by the government  ○ Taxes imposed on the citizens  ○ Control of circulating money (printing of bills may be paused or quickened)  ○ “Macro­economic policy”  ● Overall, the goal of society and the government are to stay clear of recessions and  inflation 


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