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Econ 101 Lecture 2 Notes

by: Courtney Lepine

Econ 101 Lecture 2 Notes Econ 101

Marketplace > University of Michigan > Economics > Econ 101 > Econ 101 Lecture 2 Notes
Courtney Lepine
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About this Document

These notes cover the topics discussed in our 2nd lecture
Principle Econ 1
Chad Hogan
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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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