Week 1 Notes, Chapters 1&2
Week 1 Notes, Chapters 1&2 Econ 1051
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This 5 page Class Notes was uploaded by Lauren Pike on Friday August 28, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Summer 2015. Since its upload, it has received 239 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 08/28/15
Chapter 1 Limits Alternatives and Choices 0 economics social science concerned with how individuals institutions and society make choices under conditions of scarcity 0 economic wants far exceed the capability of scarce resources Economic persbective individualsinstitutions make rational decisions by comparing marginal costs and benefitscosts of actions 0 opportunity cost value of goodservicetime sacrificed to gain something else economics assumes people reflect rational selfinterest choices are not chaotic utility satisfaction from consuming goodsservices o consumers value utility o firmsbusinesses value profit 0 govs value public services people reflect purposeful behavior make decisions with desired outcome in mind marginal analysis comparison of extra benefits and costs 0 if marginal cost MC is higher than marginal benefits MB economic activity shouldn t be expanded 0 always present in choices not always consciously Theories Principles and Models 0 economics relies on scientific method 0 observing realworld behaviors and making hypotheses o experimenting to find outcomes that acceptreject hypotheses o continuing to test hypotheses 0 principles statements about economic behavioreconomy that make predictions possible for probable effects of certain actions 0 economic principles are I generalizations relating to economyeconomic behavior tendencies of average consumer I otherthingsequal assumption all variables except those under immediate consideration are constant Pepsi ex on pg 12 I graphical expression Microeconomics vs Macroeconomics 0 micro decisionmaking by individual consumershouseholdsbusinesses o macro economy as a wholebasic subdivisionsaggregates o aggregates collection of small econ units grouped into larger unit Individual s Economic Problem 0 econ problem need for individual to make choices bc wants exceed needs 0 limited income 0 unlimited wants 0 budget line constraints a line that shows various combos of two products consumer can purchase they show I attainableunattainable combos I trade offs I opportunity cost 0 constant opp cost opp cost remains the same as consumers shift purchases on budget line I choice indivs want to make best decision I income changes Societv s Economic Problem 0 scarce resources land labor capital entrepreneurial ability used in production of goodsservices 0 types of resources these are known as factors of productioninputs I land gifts of nature I labor physical actionsmental capabilities I capital manmade resourcesproductive equipment I entrepreneurial ability human talent that combines other resources to produce productmake decisionsbear risks Production Possibilities Model 0 consumer goods products that directly satisfy wants 0 capital goods products that indirectly satisfy wants by making production efficient 0 PP tablecurve show combo of 2 goodsservices that can be produced in fully employed economy assuming that available supplies resources tech are fixed 0 steeper the slope the higher the opp cost 0 See page 15 for example diagrams 0 Law of increasing opp costs more of a product society produces the higher the opp cost of obtaining extra unit 0 optimum allocation best combo of consumer and capital goods 0 any economic activity should be expanded if MBgtMC o optimal amount occurs when MBMC indicated by intersection of MB and MC curveslines 0 See page 18 for example Unemplovment Growth and the Future 0 economic growth outward shift in production possibilities that results from increase in resources suppliesqualitytech improvement 0 result of growth fullemployment economy can enjoy increased output of both consumption and capital goods 0 present choices and future possibilities o by currently choosing an output more favorable to future production ex tech advances better quality economic growth is achieved Chapter 2 The Market System and The Circular Flow Economic systems particular set of institutional arrangements and a coordinating mechanism for producing goods and services 0 must decide on o goods produced 0 how they are produced 0 who gets them 0 how to promote tech progress 0 differ based on 0 who owns factors of production 0 method used to motivate set up and direct each economic activity The Command Svstem aka socialism or communism economic system where most property resources are gov owned and economic decisions made by central planning board 0 central board makes nearly all decisions concerning 0 use of resources 0 composition and distribution of output 0 organization of production 0 allocation of capital goods in firms 0 pure command economy relies exclusively on central plan 0 in reality most CEs tolerate some private ownership 0 North Korea and Cuba are last remaining ex of largely centrally planned economies The Market Svstem aka capitalism property resources are privately owned markets and prices used to direct and coordinate economic activity 0 system allows 0 private ownership of capital 0 pnces activity through markets I markets places where buyers and sellers come together to buysell goodsservices 0 competition 0 more options 0 monetary rewards as incentives 0 pure capitalism laissez faire gov role limited to protecting private property and establishing environment proper for market 0 Iaissez faire let it be 0 o In US and other capitalist countries gov also promotes economic growth provides other goodsservices otherwise unproduced and modifies distribution of income 0 gov not dominating force market is o gov may be needed to alleviate market failures Characteristics of the Market Svstem 0 private property 0 ppl pass on property after death continuing private ownership 0 extends to intellectual property through patents copyrights and trademarks o facilitates exchange 0 enables more focus on goodsservices 0 freedom of enterprise and choice 0 enterprise freedom businesses free to get resources to makesell what they want 0 choice freedom owners use propertymoney how they want consumers free to buy what they want 0 selfinterest competition markets and prices tech and capital goods specialization use of resources of an indivregionnation to produce 1 or a few goodsservices rather than entire range 0 human specialization division of labor contributes to society s output by I making use of different abilities I fostering learning by doing I saving time o geographic specialization different regions produce products better suited to their geographic location 0 use of money 0 medium of exchange items sellers generally accept and buyers generally use to pay for goodsservices ex money 0 barter trading goods for goods requires coincidence of wants 0 ppl have used cattle cigarettes shells and stones as money 0 active but limited gov Four Fundamental Questions 0 What will be produced 0 goodsservices that make continuing profit produced continuing loss are discontinued continuing profit total revenue TR gt total cost TC industry increases continuing losses TCltTR industry decreases consumer sovereignty consumers freely decide goodsservices produced through their purchases I those purchases are called dollar votes 0 How will goodsservices be produced 0 competition eliminates highcost producers o minimize cost per unit by using most efficient techniques I tech I prices of necessary resources 0 Who will get the output 0 consumers w ability and willingness to pay 0 ability depends on income 0 How will system promote progress 0 tech advance 0 creative destruction creation of new product makes previous obsolete 0 capital accumulation I financial system that channels funds 0 invisible hand according to Adam Smith the tendency firms seeking to further their own selfinterest in competitive markets to also promote society as a whole The Circular Flow Model flow of resources from households to firms and products of firms to households 0 households onemore ppl occupying housing unit that provide resources to economy and use income to purchase goodsservices Revenue Spending Market for Goods And Services Goods and services bought Goods and Services sold Firms Households Business you A Human natural and capital resources Production inputs Market for Factors Of Production Revenue Wages Rent and Profit 0 types of businesses 0 sole proprietorship business ownedoperated by one person 0 partnership twomore indivs partners ownoperate o corporation legal creation that can acquire resources own assets produce and sell products incur debt extend credit sue and be sued and perform other functions of enterprise I legally separate from stockholders
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