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ECON 1 - Lecture 1 (9/22/16)

by: Viola You

ECON 1 - Lecture 1 (9/22/16) ECON 1

Viola You
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Chapter 1 - Ten Principles of Economics - Incentives Matter - Markets are usually a good way to organize economic activity - People face trade offs - Rational people think at the margin - The ...
Principles of Economics
R. Rojas
Class Notes
Economics, Microeconomics




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This 6 page Class Notes was uploaded by Viola You on Tuesday August 30, 2016. The Class Notes belongs to ECON 1 at University of California - Los Angeles taught by R. Rojas in Fall 2016. Since its upload, it has received 31 views. For similar materials see Principles of Economics in Economics at University of California - Los Angeles.


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Date Created: 08/30/16
Textbook: Principles of Economics. N. Gregory Mankiw, 7th Edition with MindTap Printed  Access Code. Cengage Learning.  MindTap Registration Web Site:  MindTap Tutorials: *CAN DO TRIAL IF DECIDING* ­ 10/12 expires Midterm 1: 10/20, Chapt 1­6, MC Midterm 2: 11/17 Chapt 7­10, 13, MC Final: 12/8 Cumulative, 11:30­2:30, can use calculator  Assignments by Friday 10PM Only Cengage hw assignments are graded, MindTap examples are practice  Chapter 1 ­ Ten Principles of Economics What kinds of questions does economics address? ● Where should we spend our time, resources ● Scarcity of resources ● Profit and maximization What are the principles of how people make decisions? What are the principles of how people interact? What are the principles of how the economy as a whole works? INCENTIVES Define scarcity ­ the limited nature of society’s resources ● Resources are scarce ○ Oil, energy, food, water ● How do we get to decide as a society who gets how much of it? Define economics  ­ the study of how society manages its scarce resources ● How people decide what to buy ● How much to work, save, spend ● How firms decide how much to produce, workers to hire ● How to divide its resources between national defense, consumer goods,  protecting the environment BIG IDEA #1 ­ Incentives Matter Define incentives ­ something that induces a person to act, the prospect of a reward or  punishment ● Rational people respond to incentives ○ “Rational people” ­ assuming the outcome of their actions is what  we’d expect to see ON AVERAGE (nationally) ● People respond to incentives in predictable ways ● Self­interest is an important incentive in economics ○ When pursuing self­interest, it helps society ­ it’s not selfish ■ I.e. education ­ resolution to crime rates, helping  others  Examples: ● When gas prices rise, consumers buy more hybrid cards and fewer gas guzzling  SUVs ● When cigarette taxes increase, teen smoking falls BIG IDEA #2 ­ Markets are usually a good way to organize economic activity Define market ­ a group of buyers and sellers (need not be in a single location) ● Goods and services being exchanged “Organize economic activity” meaning determining: ● What goods to produce ● How to produce them ● How much of each to produce ● Who gets them There is no one person in charge of the bullets above, but it happens anyway in the market ­  MARKET ECONOMY A market economy allocates resources through the decentralized decisions of many  households and firms and they interacts in markets ● Price reflects the demand and popularity The Wealth of Nations ­ Adam Smith: Each of these households and firm acts as if “led by an invisible hand” to promote general  economic well­being The invisible hand works through the price system: ● Price and quality, appeal, popularity, trends ● The interaction of buyers and sellers determines prices ○ Buyer wants to buy a lot less, seller wants to sell for more, but  there needs to be an equilibrium ● Each price reflects the good’s value to buyers and the cost of producing the good ● Prices guide self­interested households and firms to make decisions that, in  many cases, maximize society’s economic well­being ○ Price so that everyone is happy, maximizes society’s well­being ­  but if someone is unhappy, then there is unbalance for both parties BIG IDEA #3 ­ People face trade offs i.e. in society ● Going to a party the night before your midterm leaves less time for studying ● Having more money to buy stuff requires working longer hours, which leaves less time for leisure ● Protecting the environment requires resources that could otherwise be used to  produce consumer goods i.e. in economy ● Cheap energy vs environmental impact ● How to allocate budgeting ● “What are the benefits from these?” ­ in coming to a decision CENTRAL IDEA: society faces an important tradeoff: efficiency vs equality Define efficiency ­ when society gets the most from its scarce resources ● Example: Singapore, Hong Kong Define equality ­ when prosperity is distributed uniformly among society’s members ● Closer to equality than efficiency example: socialist or communist society The tradeoff here: to achieve greater equality, we could redistribute income from wealthy to  poor. But this reduces the incentive to work and produce, shrinks the size of the economic “pie.” ● There will be consequences for greater part of either efficiency or equality CENTRAL IDEA: making decisions requires comparing the costs and benefits of alternative choices Define opportunity cost ­ of any item is whatever must be given up to obtain it ● It is the relevant cost for decision making ● I.e. time, tuition Examples: the opportunity cost of ● Going to college for a year is not just the tuition, books, and fees, but also  foregone wages ● Seeing movie not just the price of the ticket, but value of the time you spend in  the theater ● Buying item: Giving up some fun in order to save for retirement ● Groceries (time spent walking) vs eating out BIG IDEA #4 ­ Rational people think at the margin Define rational people ● systematically and purposefully do the best they can to achieve their objectives ○ i.e. Long lines for a snack vs getting to class on time, probably  would rather go to class and eat afterwards ● Make decisions by evaluating costs and benefits of marginal changes,  incremental adjustments to an existing plan ○ Cost benefit analysis ○ Margin ­ cost associated; do the benefits outweigh the costs?  Judgment call ■ (Dictionary) definition of margin: the difference  between a product or service's selling price and its cost of production or  to the ratio between a company's revenues and expenses ■ i.e. employer: is it worth it to hire this person? Is the work going well? What is the cost vs benefit, does it make sense to go  forward? Example: ● LA to SF, found one airline with one open seat at LAX, cost is $100 one­way. Go  to counter and I offer $75.  ○ If yes: better than getting $0 when no one takes that seat ○ If no: lots of people are probably lined up to pay for that $100 ○ Thinking at the margin: cost to bring that one passenger ­ a little  more fuel, soda, prob $20; benefit ○ The airline would benefit a lot more by just letting the passenger  on because it’s more than the cost (roughly $55 profit) ● Diamond­water paradox: water is essential for life but virtually free, diamonds are inessential but expensive ○ Marginal cost of water is a lot lower than that of diamonds ○ Limited cost of diamonds vs water ○ But diamond is a luxury (like manicure, TV, AC lol) ■ Technically luxuries have a premium, they should  be more expensive, but healthcare and education are actually expensive BIG IDEA #5 ­ The power of trade ● Rather than being self­sufficient, people can specialize in producing one good or  service in exchange it for other goods ○ i.e. Coffee, clothing, bananas ○ Consequences: labor costs, pollution  ● Countries also benefit from trade and specialization: ○ Get a better price abroad for goods they produce ○ Buy other goods more cheaply from abroad than could be  produced at home ■ Prices would be higher if growing at home because  we have to use up our own resources ■ But Japan doesn’t have a lot of their resources and  they are doing well, because they specialize and trade well ○ TRADE SEEMS TO BE A LOT BETTER THAN JUST BEING  SELF­SUFFICIENT CENTRAL IDEA: trade can make everyone better off BIG IDEA #6 ­ The importance of wealth and economic growth CENTRAL IDEA: a country’s standard of living depends on its ability to produce goods and services Huge variation in living standards across countries and over time: ● Average income in rich countries is more than 10x average income in poor  countries ○ Things that contribute to these standards: stability of gov’t,  proximities to resources, civic institutions (support in economic activity),  technology, innovation, history ● US standard of living today is about 8x larger than 100 years ago CENTRAL IDEA: the most important determinant of living standards is PRODUCTIVITY, i.e. the amount of goods and services produced per unit of labor ● Productivity depends on equipment, skills, technology available to workers ● Other factors (labor unions, competition from abroad) have far less impact on  living standards Productivity leads to efficiency, then there’s a trade off in society between equality and  efficiency (does not necessarily consider moral standards) BIG IDEA #7 ­ Institutions matter CENTRAL IDEA: the important role for government is to enforce property rights (with i.e. police, courts, etc) ● People are less inclined to work, produce, invest, or purchase if there’s a large  risk of their property being stolen ● Living standards → productivity → institutions Define market failure ­ when the market fails to allocate society’s resources efficiently Causes of market failure: ● Externalities ­ when the production for consumption of a good affects  bystanders (i.e. pollution) ○ Things that bring up healthcare costs, more traffic ● Market power ­ a single buyer or seller has substantial influence on market price (i.e. monopoly) ○ They are not price takers, they are price makers ■ Epi­pens, glasses


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