Microeconomics 201 ~ Chapter 1
Microeconomics 201 ~ Chapter 1 201
Popular in Principles of Microeconomics
Popular in Microeconomics
This 5 page Class Notes was uploaded by Roger D. on Saturday September 10, 2016. The Class Notes belongs to 201 at University of North Dakota taught by Dr. Xiao Wang in Fall 2016. Since its upload, it has received 5 views. For similar materials see Principles of Microeconomics in Microeconomics at University of North Dakota.
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Date Created: 09/10/16
Chapter 1 ~ First Principles • A set of 4 principles for understanding how individuals make choices • A set of 5 principles for understanding how individual choices interact • A set of 3 principles for understanding economy-wide interactions Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do. Basic principles behind the individual choices: 1. Resources are scarce. 2. The real cost of something is what you must give up to get it. 3. “How much?” is a decision at the margin. 4. People usually take advantage of opportunities to make themselves better off. Choices Are Necessary Because Resources Are Scarce • A resource is anything that can be used to produce something else. Examples: land, labor, capital • Resources are scarce – the quantity available isn’t large enough to satisfy all productive uses. Examples: petroleum, lumber, intelligence The True Cost of an Item Is Its Opportunity Cost • The real cost of an item is its opportunity cost: what you must give up in order to get it. • Opportunity cost is crucial to understanding individual choice Example: The cost of attending an economics class is what you must give up to be in the classroom during the lecture. Sleep? Watching TV? Rock climbing? Work? • All costs are ultimately opportunity costs. • In fact, everybody thinks about opportunity cost. • The bumper stickers that say “I would rather be … (fishing, golfing, swimming, etc…)” are referring to opportunity cost. • It is all about what you have to forgo to obtain your choice. “How Much?” Is a Decision at the Margin • You make a trade-off when you compare the costs with the benefits of doing something. • Decisions about whether to do a bit more or a bit less of an activity are marginal decisions. Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less. The study of such decisions is known as marginal analysis. Examples: Hiring one more worker, studying one more hour, eating one more cookie, buying one more CD, etc. People Usually Respond to Incentives, Exploiting Opportunities to Make Themselves Better Off • An incentive is anything that offers rewards to people who change their behavior. Examples: 1. Price of gasoline rises people buy more fuel-efficient cars; 2. There are more well-paid jobs available for college graduates with economics degrees more students major in economics • People respond to these incentives. Interaction of choices—my choices affect your choices, and vice versa—is a feature of most economic situations. Principles that underlie the interaction of individual choices: 1. There are gains from trade. 2. Markets move toward equilibrium. 3. Resources should be used as efficiently as possible to achieve society’s goals. 4. Markets usually lead to efficiency. 5. When markets don’t achieve efficiency, government intervention can improve society’s welfare. There Are Gains From Trade • In a market economy, individuals engage in trade: They provide goods and services to others and receive goods and services in return. • There are gains from trade: people can get more of what they want through trade than they could if they tried to be self-sufficient. • A joke: Achieving free trade is like getting to heaven. Everyone one wants to get there, but not too soon. This increase in output is due to specialization: each person specializes in the task that he or she is good at performing. The economy, as a whole, can produce more when each person specializes in a task and trades with others. Markets Move Towards Equilibrium • An economic situation is in equilibrium when no individual would be better off doing something different. • Any time there is a change, the economy will move to a new equilibrium. Example: What happens when a new checkout line opens at a busy supermarket? Resources Should Be Used Efficiently As Possible to Achieve Society’s Goals • An economy is efficient if it takes all opportunities to make some people better off without making other people worse off. • Should economic policy makers always strive to achieve economic efficiency? • Equity means that everyone gets his or her fair share. Since people can disagree about what’s “fair,” equity isn’t as well-defined a concept as efficiency. • Example: Handicapped-designated parking spaces in a busy parking lot • A conflict between: Equity, making life “fairer” for handicapped people, and Efficiency, making sure that all opportunities to make people better off have been fully exploited by never letting parking spaces go unused. • How far should policy makers go in promoting equity over efficiency? Markets Usually Lead to Efficiency • The incentives built into a market economy already ensure that resources are usually put to good use. • Opportunities to make people better off are not wasted. • Exceptions: Market failure (the individual pursuit of self-interest found in markets makes society worse off ) the market outcome is inefficient • A joke: Light bulb jokes are always in... Q: How many Chicago School economists does it take to change a light bulb? A: None. If the light bulb needed changing the market would have already done it. When Markets Don’t Achieve Efficiency, Government Intervention Can Improve Society’s Welfare Why do markets fail? • Individual actions have side effects not taken into account by the market (externalities). • One party prevents mutually beneficial trades from occurring in the attempt to capture a greater share of resources for itself. • Some goods cannot be efficiently managed by markets. Example: freeways in Los Angeles Principles that underlie economy-wide interactions Principle# 10: One person’s spending is another person’s income. Principle# 11: Overall spending sometimes gets out of line with the economy’s productive capacity. Principle# 12: Government policies can change spending. 12 CORE PRINCIPLES OF ECONOMICS 1. Choices (trade-offs) are necessary because resources are scarce. Land, Labor, Physical Capital, Human Capital ~ factors of production Petroleum, Lumbar, Time, Money, Skilled Workers 2. The true cost of something is its opportunity cost – something has to be given up (forgone) to get it. All costs are ultimately opportunity costs You have to forgo something to get your final choice 3. “How much” is a marginal decision – it involves some kind of trade-off You compare costs vs benefits of an activity Hiring one more worker, studying one more hour, how much more coffee to drink before bedtime, eating one more cookie, buying one more music CD 4. People usually respond to incentives by exploiting opportunities to make themselves better off. How incentives are designed is important: The relationship between effort, outcome and speed matters a lot 5. There are gains from trade. This involves specialization and output is increased by it 6. Markets move towards equilibrium. When a change occurs, re-stabilization will eventually happen and then no individual will be better off doing something different 7. Resources should be used efficiently to achieve society’s goals and needs. An economy is efficient if it takes all opportunities to make some people better off without making others worse off Equity means that everyone gets their “fair” share 8. Markets usually lead to (create) efficiency. Best allocation of resources and no further adjustments needed People exploit gains from a trade 9. When markets don’t achieve efficiency, government intervention can improve society’s welfare. Market failure; occurs when society is worse off because of an individual’s pursuit of self- interest 10. One person’s spending is another person’s income. 11. Overall spending sometimes gets out of line with the economy’s productive capacity; such as, inflation or a recession 12. Government policies can change spending. Macro-economic policy ~ government’s spending, taxes and money control via interest rates
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