ECON-351: Chapter 1 Notes
ECON-351: Chapter 1 Notes Econ 351
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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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