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Chapter 1: The Challenge of Economics

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Chapter 1: The Challenge of Economics 100

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Class notes from lecture.
Introduction to Economics
Carole Miller
Class Notes
Economics, Econ
25 ?




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This 7 page Class Notes was uploaded by Austin on Saturday September 17, 2016. The Class Notes belongs to 100 at University of Rhode Island taught by Carole Miller in Fall 2016. Since its upload, it has received 5 views. For similar materials see Introduction to Economics in Economics at University of Rhode Island.


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Date Created: 09/17/16
Chapter 1: The Challenge of Economics Thursday, September 8, 2016 11:16 AM Economics  The study of how best to allocate scarce resources among competing uses in the best possible way.  The study of the allocation of scarce resources used in the production of goods and services that satisfy unlimited wants and desires. 3 Resources 1 Land (Raw materials) 2 Labor (Physical, Managerial skills) C 3 Capital (Factory, Machine, Tools, etc.) Scarcity  Lack of available resources to satisfy all desired uses of those resources  Central problem of economics Opportunity Cost  The most desired goods and services that are foregone in order to obtain something else.  The next best alternative that is sacrificed for the chosen alternative. Rational Action  Weigh the benefits you expect to get from a choice against the opportunity cost and then decide whether or not to make the choice. (Is it worth it to make that decision?) Factors of Production  Resources or inputs used to produce goods and services  These four resources are the basic ingredients of production: Land, Labor, Capital, and Entrepreneurship (New idea, Creating a business, Filling a demand, Innovative) Three Basic Questions 1 WHAT to produce? (and how much) Is there a demand? Is there enough resources? What is most needed? Sacrifice less demanded goods? 2 HOW to produce? (Labor or Capital?) Where to produce? 3 FOR WHOM to produce? Production Possibilities Curve  Describes the alternative combinations of goods and services that can be produced in a given time period with all available resources and technology.  The maximum amount of two goods that can e produced with full employment of resources. The Choices Nations Make  A nation must choose what to do with its scarce resources during war or periods of military buildup.  Produce military goods ("Guns) or consumer goods ("Butter")  Every time we increase missile production, housing construction must be reduced. The Optimal Mix  There is only one optimal (Best possible) mix of output at any given time.  The first economic goal of any society is produce that optimal mix of output, the optimal combination of goods and services. Chapter 1 (cont.) Tuesday, September 13, 2016 10:59 AM Present vs. Future Consumption  We could use our resources and technology to produce for the present or for future consumption.  Present? no growth  Future? added resources expand production in the future  Investment: Producing new plant and equipment (capital), plus changes in inventories. Economic Growth  An increase in output (real GDP: Gross Domestic Product - way of measuring what's produced in the country)  Real - adjust for inflation  Nominal - no adjustments (May show a large increase in profit even though it is the same)  An expansion of production possibilities outward  Due to increased capital and technology Figure 1.5  Production possibilities increase with more resources and better technology Question 2: HOW to Produce?  The second economic goal for every society is to find an optimal method of producing goods and services.  The least-cost combination resources may be labor-intensive or capital- intensive. Question 3: FOR WHOM to Produce?  The FOR WHOM question focuses on how an economy's output is distributed across members of society  The goods and services produced can be divided in several ways:  Distribution based on productive contributions  Distribution based on need  Some combination of productive contributions and need The Market Mechanism  The use of market prices and sales to signal desired output (or resource allocations).  Market - an arena where sales take place  Market sales and prices send a signal to producers about what mix of output consumers want The Market Mechanism  Nonintervention by government in market mechanism  Laissez faire is the doctrine of "leave it alone."  The market alone makes the basic economic decisions  Adam Smith's The Wealth of Nations (1776) promoted laissez faire. Central Planning  The government decides what goods are produced, at what prices they are sold, and who gets them.  This mechanism of choice is associated with Karl Marx. Mixed Economies  Economies that use both market and non-market signals to allocate goods and resources are mixed economies.  This represents a combination of the other two systems. Market Failure  Markets don't always produce the "right" mix of output.  Market Failure - The market mechanism does not generate the optimal answers to the WHAT, HOW, and FOR WHOM questions. Government Failure  Occurs when government intervention fails to improve economic outcomes.  Government will not necessarily offer better answers to the WHAT, HOW, and FOR WHOM questions than the market mechanism does.  Government intervention might worsen the mix of output.  It might even reduce the total amount of output through over- regulation.  There is no guarantee that the visible hand of government will be any cleaner than the invisible hand of the marketplace. Macro vs. Micro  Macroeconomics - the study of aggregate economic behavior, of the economy as a whole.  Microeconomics - the study of individual behavior in the economy, of the components of the larger economy. Ceteris Paribus  It is the assumption that nothing else is changing.  It is an important part of "thinking like an economist." What We Learned  Scarcity results when our wants exceed our resources.  All products have an opportunity cost. We can product more of A only if we produce less of B.  Every nation confronts the three basic questions: WHAT, HOW, and FOR WHOM to produce.  Market economies answer these questions by individual choice of consumers and producers; command economies answer by central planning.  Markets do not always produce optimum outcomes (market failure), but government intervention may not do any better (government failure).


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