Microeconomics Chapter 2 Notes
Microeconomics Chapter 2 Notes ECON 1010
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This 3 page Class Notes was uploaded by Danyn Notetaker on Thursday March 3, 2016. The Class Notes belongs to ECON 1010 at Tulane University taught by Armine Shahoyan in Summer 2015. Since its upload, it has received 14 views. For similar materials see Microeconomics in Economcs at Tulane University.
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Date Created: 03/03/16
Economic Systems - Economic systems differ in two different ways: who owns the factors of production and the method used to coordinate economic activity - Command economy, socialism or communism: • There is public ownership of resources • Economic activity is coordinated by central planning - The Laissez-Faire system: There is private ownership of resources • Markets and prices coordinate and direct economic activity • • Each participants acts in his or her self-interest • In pure capitalism the government plays a very limited role • In the U.S. version of capitalism the government plays a substantial role; mixed economy Characteristics of the Market System - Private - individuals and ﬁrms own most of the private property (land and capital) • Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, control, use, and dispose of this property • Private property rights spur mutually agreeable transactions • Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and economic growth Property rights extend to intellectual property through patents, copyrights, and trade marks - Freedom of enterprise and choice exist • Freedom of enterprise means that entrepreneurs and businesses have the freedom to to obtain and use resources, to produce products of their choice • Freedom of choice means: - Owners of property and money resources can use resources as they choose - Workers can choose training, occupations ,and jobs of their choice - Consumers are free to spend their income as they choose - Self interest • Self interest is one of the driving forces in a market system. Entrepreneurs try to maximize proﬁts and minimize the losses; consumers maximize satisfaction • As each tries maximizer proﬁts, income, satisfaction, the economy will beneﬁt if competition is present - Competition among buyers and sellers is a controlling mechanism • Large numbers of sellers means that no single producer or seller can control the price or market supply • Large number of buyers means that no single consumer or employer can control the price or market demand • Depending upon market market conditions, producers can enter or leave industry easily - Markets and prices • A market system conveys the decisions of the many many buyers and sellers of the product and resource markets • A market us an institution or mechanism that brings buys and sellers into contact • Individual decisions by buyers in the market determine the product and resource owners, producers, and consumers Those who respond to he market signals will be rewarded with proﬁts and income • - Reliance on technology and capital goods • Competition, freedom of choice, self interest, and the potential of proﬁts provide the incentive for capital accumulation (investment) • Advanced technology and capital goods promoted efﬁcient and greater output - Specialization • Division of labor allows workers to specialize - People take advantage of the differences in abilities and skills - People with identical skills still beneﬁt from specialization and improving skills - Specialization saves time involved in shifting from one task to another • Geographic specialization regional and international specialization take advantage of localized resources - Use of money as a medium of exchange Money substitutes for barter, which requires a coincidence of wants • • Willingness to accept money in place of goods permits 3-way trade - Floridans give money to Nebraska for wheat, who gives money to Idahoans for potatoes, who give money to Floridians for oranges - Foreign exchange markets permit Americans, Japanese, Germans, Brits, and Mexicans tp compete international goods and services - Active but limited government • Although the market system has certain shortcomings, it promotes efﬁciency Five Fundamental Questions - Although this chapter focuses on the market system, the ﬁve fundamental questions must be answered by all economic systems What goods and Services will be produced? • - In order to be proﬁtable, businesses must respond to consumers’ wants and desires - Consumer Sovereignty • The key to determining the types and quantity of the various products • Businesses are not really ‘free’ to produce what they want, They must match production choices with consumer choices in order to be successful - As with producers of consumer goods and decisions of resource suppliers are driven by the desires of consumers for the products provided by the resources they own • How will the goods and services be produced? - The market system encourages and rewards those producers who achieving least cost production - Least cost production techniques include: Locating ﬁrms in optimum location • Considering resources prices • • resource productivity and transportation costs • available technology • General resource prices - The most efﬁcient technique will be the one that produces a given amount of output with the smallest input of scare resources when both inputs and outputs are measured in dollars and cents • Who will get the output? - The answer is directly related to how the income is distributed among the individuals and the households and the tastes and preferences of consumers - Products go to those are willing and able to pay for them - The productivity of the resources, the relative supply of particular resources, and the ownership of the resources will determine the individuals and households - The resource markets, which determine income, are linked to this decision • How will the system accommodate change? - Markets are dynamic— what is efﬁcient today may not be tomorrow as tastes, technology, and resource supplies chance • Prices help signal these chances - An increase in demand for some products will lead to higher prices in those markets; decrease in demand for other products will lead to lower pries - increased demand leads to higher prices that induce greater quantities of output from suppliers The opposite is true for a decrease in demand •
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