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ECON-351: Chapter 1 Notes

by: Alexander Harutunian

ECON-351: Chapter 1 Notes Econ 351

Alexander Harutunian
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About this Document

These notes cover the first chapter of our textbook, Economics- Foundations and Models
Microeconomics for Business
Dr. Sena Durguner
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This 4 page Class Notes was uploaded by Alexander Harutunian on Monday September 12, 2016. The Class Notes belongs to Econ 351 at University of Southern California taught by Dr. Sena Durguner in Fall 2016. Since its upload, it has received 8 views. For similar materials see Microeconomics for Business in Business at University of Southern California.


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Date Created: 09/12/16
Chapter 1: Economics­ Foundations and Models  Sections: 1.1, 1.2, 1.4    Section 1.1: Three Key Economic Ideas  Scarcity­ a situation in which unlimited wants exceed the limited resources available to fulfill  those wants  Economics: the study of choices people make to attain their goals, given their scarce resources  Economic model­ a simplified version of reality used to analyze real­world economic situations  Market: a group of buyers and sellers of a good or service and the institution or arrangement by  which they come together to serve  Interact w/ markets while trying to achieve goals  3 key economic ideas:  1. People are rational  2. People respond to economic incentives  3. Optimal decisions are made at the margin    People are Rational  Economists assume people are rational  Doesn’t mean they assume people know everything or always make the best decision  Assume that consumers and firms use all available information as they act to achieve their goals  Rational individuals weigh the benefits and costs of each action, and act if the benefits outweigh  the costs  Not everyone behaves rationally all the time    People Respond to Economic Incentives  Humans act from a variety of motives  Economists emphasize that consumers and firms consistently respond to economic incentives    Optimal Decisions are Made at the Margin  Most decisions are not “all or nothing”  Many small choices are involved, day by day  Marginal: extra or additional  Marginal analysis: analysis that involves comparing marginal benefits and marginal costs  Economists reason that the optimal decision is to continue any activity up to the point where the  Marginal benefit equals the marginal cost (MB=MC)  Marginal benefit: the benefit received from producing one additional good  Marginal cost: the cost of producing one additional good      Section 1.2: The Economic Problem That Every Society Must Solve  Because of scarcity, we face an economic problem (limited resources = limited goods)  Every society faces trade­offs  Trade­off: the idea that because of scarcity, producing more of one good or service means  producing less of another good or service  Opportunity Cost: the highest valued alternative that must be given up to engage in an activity  Trade­offs force society to make choices when answering the following three fundamental  questions:  1. What goods and services will be produced?  2. How will those goods and services be produced?  3. Who will receive the goods and services?    What goods and services will be produced?  Determined by the choices made by firms, consumers, and the government  consumers, firms, and the government face the problem of scarcity by trading off one goods for  another  Each choice made comes with an opportunity cost, measured by the value of the best alternative    How will the goods and services be produced?  Forms choose how to produce the goods and services they sell  In many cases, firms face the trade­off of using more workers or more machines    Who will receive the good produced?  In the US, the answer depends largely on income distribution  Should the government intervene and make the distribution of income more equal?  In US, people with larger incomes pay a large share in their taxes    Centrally Planned Economies versus Market Economies  Centrally planned economy: an economy in which the government decides how economic  resources will be allocated  Market economy: an economy in which he decision of households and firms interacting in  markets determines the allocation of resources  All high income democracies have market economies  North Korea is the only country to have a completely centrally planned economy  Market economies primarily rely on privately owned firms to produce the goods and services and  decide how to produce them  Markets, rather than the government, decide who gets to receive the goods and services produced  One attractive feature of markets is that it rewards hard work    The Modern “Mixed” Economy  Early on the US regulated the markets for goods and services minimally  After the great Depression that changed with FDR’s New Deal  Mixed economy: an economy in which the most key economic decisions result from the  interaction of buyers and sellers in which the government plays a significant role in the  allocation of resources  A mixed economy is still primarily a market economy; the government plays a significant role in  the allocation of resources  One of the most important recent developments in international economics is the transition of  China from a centrally planned economy to a mixed economy    Efficiency and Equity  Market economies tend to be more efficient than centrally planned economies  Productive efficiency: a situation in which a good or is produced at the lowest possible cost  Allocative efficiency: a state of the economy in which production is in accordance with  consumer preferences; in particular, every good or service is produced up to the point where the  last unit provides a marginal benefit to society equal to the marginal cost of producing it  Markets tend to be efficient because they promote competition and facilitate voluntary exchange  Voluntary exchange: a situation that occurs in markets when both the buyer and the seller of a  product are made better of by the transaction  Inefficiency can arise from various sources  It may take some time to achieve an efficient outcome  Governments may interfere with voluntary exchange in markets  Government can interfere if production is damaging the environment, thereby increasing  efficiency by avoiding environmental damage  Equity: the fair distribution of economic benefits  Many people prefer economic outcomes that they consider equitable  There is often a trade off between efficiency and equity    Section 1.4: Microeconomics and Macroeconomics  Microeconomics: the study of how households and firms make choices, how they interact in  markets, and how the government attempts to influence their choices  Microeconmic issues include explaining how consumers react to changes in product price and  how firms decide what prices to charge for the products they sell  Also involves policy issues (analyzing most efficient way to reduce teen smoking; analyzing cost  and benefits of approving the sale of a new drug)  Macroeconomics: the study of the economy as a whole, including topics such as inflation,  unemployment, and economic growth  Macroeconomic issues include explaining why economies experience periods of recession and  increasing unemployment, and why some economies have grown much faster than others  Also involves policy issues (whether government interventions can reduce the severity of  recessions)  Many economic situations include both macro and microeconomics  


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