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Chapter 1 Notes

by: Corinne Bobish

Chapter 1 Notes ECN 211

Corinne Bobish
GPA 2.7
Macroeconomic Principles

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Chapter 1: Ten Principles of Economics notes
Macroeconomic Principles
Class Notes
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This 4 page Class Notes was uploaded by Corinne Bobish on Wednesday August 26, 2015. The Class Notes belongs to ECN 211 at Arizona State University taught by Pereira in Fall 2015. Since its upload, it has received 225 views. For similar materials see Macroeconomic Principles in Economcs at Arizona State University.


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Date Created: 08/26/15
Scarcitylimited nature of society s resources Economicsstudy of how society manages scarce resources Study of mankind in the ordinary business of life Economygroup of people dealing with one another as they go about their lives TEN PRINCIPLES OF ECONOMICS 1 People face tradeoffs a b 919 f Making decisions require trading off one goal against another Guns vs butter i More spent on defenseprotection ii Less spent on goods Efficiencysociety is getting max benefits from scarce resources Equalitybenefits are distributed uniformly among society s members Tradeoffs aren t necessarily a bad thing we just need to be aware that they exist We are more likely to make better decisions when we are well informed 2 Cost of something is what you give up to get it a b Making decisions requires weighing benefits and costs Opportunity costwhat you give up to get an item 3 Rational people think at the margin a 0 Rational peoolesystematically and purposefully do the best they can to achieve their objectives given available opportunities i Not black and white ii Areas of gray Marciinal changesmall incremental adjustment to an existing plan of action Must compare the marginal benefit and marginal cost Rational decision makers take action if and only if the marginal benefit of the action exceeds the marginal cost 4 People respond to incentives a d Incentivesomething as a prospect of punishment or reward that induces a person to act High gas taxes encourages people to carpool live closer to work and drive fuel efficient cars We need to consider not only the direct effects but also the less obvious and indirect effects that work through incentives If policy changes incentives it will cause people to alter their behavior 5 Trade can make everyone better off a b c US vs Chinacompetitors in world economy Not win vs lose Competition can be a good thing for both parties involved bettering each side in the process Trade allows each side to specialize in what they do best e China is a partner as well as a competitor 6 Markets are usually a good way to organize economic activity a Market economvdecisions of a central planner are replaced by the decisions of millions of firms and households b Firms decide whom to hire and what to make Households decide which firms to work for and what to buy with their incomes d Firms and households interact in the marketplaceprices and self interest guide these decisions e Invisible Hand term coined by economist Adam Smith 1776An Inquiry into the Nature and Cause of the Wealth of Nations leads households and firms to make desirable market outcomes 7 Governments can sometimes improve market outcomes a Invisible hand can work magic only if government enforces the rules and maintains institutions that are key to a market economy b Property rightsability of an individual to own and exercise control over scarce resources c Market failuresituation in which the market on its own fails to produce an efficient allocation of resources d Externalityimpact of one person s actions on the wellbeing of a bystander POLLUTION e Market powe ability of a single person or firm or small group to unduly influence market prices f In the presence of externalities or market power welldesigned public policy can enhance economic efficiency g Inequalities in the market may require government intervention 8 A country s standard of living depends on its ability to produce goods and services a Productivityamount of goods and services produced by each unit of labor input b The relationship between productivity and living stands has profound implications for public policy 9 Prices rise when the government prints too much money a Inflationincrease in overall level of prices in the economy b Large quantities of money means that the value of money will decrease 10 Society faces a shortrun tradeoff between inflation and unemployment a Economists describe the shortrun effects of monetary injection i Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services ii Higher demand may over time cause firms to raise their prices but in the meantime it also encourages them to hire more workers and produce a larger quantity of goods and services iii More hiring means lower unemployment b Business cycleirregular and largely unpredictable fluctuations in economic activity as measured by the production of goods and services or the number of people employed 0 11 SUMMARY a The fundamental lessons about individual decision making are that people face tradeoffs among alternative goals that the cost of any action is measured in terms of forgone opportunities that rational people make decisions by comparing marginal costs and marginal benefits and that people change their behavior in response to the incentives they face b The fundamental lessons about interactions among people are that trade and interdependence can be mutually beneficial that markets are usually a good way of coordinating economic activity among people and that the government can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality c The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards that growth in the quantity of money is the ultimate source of inflation and that society faces a shortrun tradeoff between inflation and unemployment CALCULATING OPPORTUNITY COST Dave works 8 hours per day In one hour Dave can either mow 1 lawn or trim 5 bushes A What is Dave s opportunity cost of mowing 4 lawns 4 lawns 4 hours 4 hours x 5 bushes1 hour 20 bushes B What is Dave s opportunity cost of trimming 30 bushes 30 bushes 6 hours 6 hours x 1 lawn1 hour6 lawns Opportunity cost is whatever must be given up to obtain some item Any time spent mowing lawns is time lost trimming bushes Any time spent trimming bushes is time lost mowing lawns CALCULATING MARGINAL ANALYSIS Suppose Jacob is planning to sell his house He has already spent 10000 on various home repairs and can sell his house now for 100000 Jacob has the option of spending an additional 15000 to improve his kitchen in which case he will be able to sell his house for 120000 Should Jacob make the kitchen improvements before selling his house Rational decision maker takes an action if and only if the marginal bene t of the action exceeds the marginal cost Marginal Bene t must outweigh Marginal Cost Marginal Benefit MB 120000 potential sale price 100000 current sale price MB20000 Marginal Cost MC MC15000 spent on kitchen repairs MBgtMC Yes Jacob should fix his kitchen before selling his house


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