Econ 101 Lecture 2 Notes
Econ 101 Lecture 2 Notes Econ 101
Popular in Principle Econ 1
Popular in Economics
This 4 page Class Notes was uploaded by Courtney Lepine on Thursday September 8, 2016. The Class Notes belongs to Econ 101 at University of Michigan taught by Chad Hogan in Fall 2016. Since its upload, it has received 5 views. For similar materials see Principle Econ 1 in Economics at University of Michigan.
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Date Created: 09/08/16
Read Chapters 1 and 2 Assignment 1 available by 9/10 The Economic Problem Scarcity the inability to satisfy desires with available resources How do we allocate scarce resources to satisfy limited wants? What will be produced? How will it be produced? Who gets it? What? How? Who? Economic System a collection of institutions that determines how these three questions will be answered^^ The Market ● Allocate and enforce private property rights, allow agents to exchange private property voluntarily, and mediate exchange with prices. ● A machine that we interact with, we give and take ● Voluntary engagement ● Paying $x.xx for a product, or being paid an amount for a service Positive Economics Example: ❖ Who consumes gasoline? Who gets it? Does the price matter? If the price rises, will people use more or less? Normative Economics Example: ❖ Are there enough jobs for our workers? Do the right workers get jobs? Are wages too high, too low, or right? Should Federal Income tax rates be increased, decreased, or left alone. Answering these questions^^ calls for value judgements, and usually we won’t be able to provide any objective support for any particular value judgement. The Exception to the Rule: Inefficiency ● Widely embraced idea: I NEFFICIENCY IS UNDESIRABLE ● An outcome or “allocation of resources” is inefficient if it’s possible to make at least one person better off without hurting anyone else ○ A value judgement ■ Resources shouldn’t be wasted ○ Widely acceptable ■ Not universally accepted ○ Difficult to implement ■ How do we know if someone is better or worse off? ● Don’t be satisfied with inefficiency ● Imagine reallocating resources in such a way that nobody is made worse off and at least one person is better off. ○ Is this a good idea? Yes ● Normative Statement: ○ If the current allocation of resources allows some change that makes at least one person better off without making another worse off, we shouldn’t be satisfied with this distribution. ○ Inefficient^ ○ Pareto Improving Reallocation reallocation that makes at least one person better off without hurting anybody else ○ Consumer Sovereignty when someone wants/knows what is best for them. Ex: choosing to smoke ● Example ○ Ernie likes peanut butter more than bread. Bert likes bread more than peanut butter. Both prefer peanut butter sandwiches to either bread or pb. ○ If i give Ernie 2 jars of pb and Bert 2 loaves of bread, have I allocated resources inefficiently? YES ○ Pareto: give them one of each ● Example ○ Annie’s fav thing are apples. Bill’s fav thing are bananas. Chris’s fav thing is chocolate. ○ If I give annie bananas, bill chocolate, and chris apples, are the resources allocated inefficiently? YES ○ Pareto: give each person the thing that is their favorite. ● Example ○ Justin Bieber and Katy Perry announce a concert in A2, 2 kids want to go. Noah says ticket is worth $40 to him and David says ticket is worth $60 to him. I can only buy 1 ticket. ○ I give the ticket to Noah and give David $50 ○ Is this inefficient? YES ○ Pareto: Pareto Efficiency ● Pareto Efficient an allocation of resources in which there are no Pareto improving reallocations available. Any attempt to reallocate resources to the benefit of one person will be to the detriment of another. Main Questions ● How do markets allocate resources? ● What? How? For whom? ● How efficiently are resources allocated? ● Are there better ways to allocate resources? ● Look at p roduction issues: ○ What does efficiency imply about allocation of productive resources? Production Possibilities Frontier ● Production the process of transforming factors of production (inputs) into goods and services (outputs) ● Scarcity of factors of production limits the quantities of various output that can be produced ○ Therefore, outputs will be scarce as well. ● Assume: ○ 2 goods can be produced ○ The production of these goods requires at least some common inputs ○ The common inputs are scarce ● This reveals a tradeoff ○ If all productive resources are employed, then increasing output of one good implies that the output of the other good will fall. Questions of Interest Positive Questions: ● If we use markets to allocate resources, what allocation of resources is achieved? What characteristics does that allocation display? Is this allocation inefficient? ● If we use some alternative mechanism to allocate resources, what allocation of resources is achieved? What characteristics will that allocation display? Is this allocation inefficient? ● Under what conditions do we expect markets to generate inefficient allocations? Normative Questions: ● What kind of system should we use to allocate resources?
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