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by: Eloise Smitham


Eloise Smitham
GPA 3.63


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This 27 page Class Notes was uploaded by Eloise Smitham on Saturday September 12, 2015. The Class Notes belongs to ECON 2106 at University of Georgia taught by Bradley in Fall. Since its upload, it has received 6 views. For similar materials see /class/202511/econ-2106-university-of-georgia in Economcs at University of Georgia.




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Date Created: 09/12/15
CHAPTER 1 Ten Principles of Economics 9 2009 SowhWesrem a par ofCengage Learning all rights reserved I What kinds of questions does economics address I What are the principles of how people make decisions I What are the principles of how people interact I What are the principles of how the economy as a whole works This is more macroeconomics so we won t concentrate on this question What Economics Is All About I Scarcity the limited nature of society s resources I Economics the study of how society manages its scarce resources e g I how people decide what to buy how much to work save and spend I how firms decide how much to produce how many workers to hire I how society decides how to divide its resources between national defense consumer goods protecting the environment and other needs TEN PRINCIPLES OF ECONOMICS 5 Ther nciplew szzzzzzzzzzzziiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiEEEEiiiiiiiiiiiiiiiiiiiiiiii 26223323isiis3333222233 HOW PEOPLE MAKE DECISIONS Principle 1 People Face Tradeoffs All decisions involve tradeoffs Examples 39 Going to a party the night before your midterm leaves less time for studying 39 Having more money to buy stuff requires working longer hours which leaves less time for leisure 39 Protecting the environment requires resources that could otherwise be used to produce consumer goods TEN PRINCIPLES OF ECONOMICS 4 HOW PEOPLE MAKE DECISIONS Principle 1 People Face Tradeoffs 39 Society faces an important tradeoff efficiency vs equality I Efficiency when society gets the most from its scarce resources 39 Equality when prosperity is distributed uniformly among society s members I Tradeoff To achieve greater equality could redistribute income from wealthy to poor But this reduces incentive to work and produce shrinks the size of the economic pie TEN PRINCIPLES OF ECONOMICS 5 HOW PEOPLE MAKE DECISIONS Principle 2 The Cost of Something Is What You Give Up to Get It I Making decisions requires comparing the costs and benefits of alternative choices I The opportunity cost of any item is whatever must be given up to obtain it I It is the relevant cost for decision making TEN PRINCIPLES OF ECONOMICS 6 HOW PEOPLE MAKE DECISIONS Principle 2 The Cost of Something Is What You Give Up to Get It Examples The opportunity cost of going to college for a year is not just the tuition books and fees but also the foregone wages seeing a movie is not just the price of the ticket but the value of the time you spend in the theater TEN PRINCIPLES OF ECONOMICS 7 HOW PEOPLE MAKE DECISIONS Principle 3 Rational People Think at the Margin Rational people 39 systematically and purposefully do the best they can to achieve their objectives 39 make decisions by evaluating costs and benefits of marginal changes incremental adjustments to an existing plan TEN PRINCIPLES OF ECONOMICS 8 HOW PEOPLE MAKE DECISIONS Principle 3 Rational People Think at the Margin Examples I When a student considers whether to go to college for an additional year he compares the fees amp foregone wages to the extra income he could earn with the extra year of education I When a manager considers whether to increase output she compares the cost of the needed labor and materials to the extra revenue TEN PRINCIPLES OF ECONOMICS 9 ACTIVE LEARNING 1 Applying the principles You are selling your 1996 Mustang You have already spent 1000 on repairs At the last minute the transmission dies You can pay 600 to have it repaired or sell the car as is In each of the following scenarios should you have the transmission repaired Explain A Blue book value is 6500 if transmission works 5700 if it doesn t B Blue book value is 6000 if transmission works 5500 if it doesn t 10 ACTIVE LEARNING 1 Answers Cost of fixing transmission 600 A Blue book value is 6500 if transmission works 5700 if it doesn t Benefit of fixing the transmission 800 6500 5700 It s worthwhile to have the transmission fixed B Blue book value is 6000 if transmission works 5500 if it doesn t Benefit of fixing the transmission is only 500 Paying 600 to fix transmission is not worthwhile 11 ACTIVE LEARNING 1 Answers Observations I The 1000 you previously spent on repairs is irrelevant What matters is the cost and benefit of the marginal repair the transmission I The change in incentives from scenario A to scenario B caused your decision to change 12 HOW PEOPLE MAKE DECISIONS Principle 4 People Respond to Incentives I Incentive something that induces a person to act ie the prospect of a reward or punishment I Rational people respond to incentives Examples I When gas prices rise consumers buy more hybrid cars and fewer gas guzzling SUVs I When cigarette taxes increase teen smoking falls TEN PRINCIPLES OF ECONOMICS 13 The principles of HOW PEOPLE INTERACT HOW PEOPLE INTERACT Principle 5 Trade Can Make Everyone Better Off I Rather than being selfsufficient people can specialize in producing one good or service and exchange it for other goods I Countries also benefit from trade amp specialization 39 Get a better price abroad for goods they produce 39 Buy other goods more cheaply from abroad than could be produced at home TEN PRINCIPLES OF ECONOMICS 15 HOW PEOPLE INTERACT Principle 6 Markets Are Usually A Good Way to Organize Economic Activity I Market a group of buyers and sellers need not be in a single location for example the internet I Organize economic activity means determining I m goods to produce I how to produce them I how much of each to produce I who gets them TEN PRINCIPLES OF ECONOMICS 16 HOW PEOPLE INTERACT Principle 6 Markets Are Usually A Good Way to Organize Economic Activity I A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets I Famous insight by Adam Smith in The Wealth of Nations 1776 Each of these households and firms acts as if led by an invisible hand to promote general economic wellbeing TEN PRINCIPLES OF ECONOMICS 17 HOW PEOPLE INTERACT Principle 6 Markets Are Usually A Good Way to Organize Economic Activity 39 The invisible hand works through the price system 39 The interaction of buyers and sellers determines prices I Each price reflects the goods value to buyers and the cost of producing the good I Prices guide selfinterested households and firms to make decisions that in many cases maximize society s economic wellbeing TEN PRINCIPLES OF ECONOMICS 18 HOW PEOPLE INTERACT Principle 7 Governments Can Sometimes Improve Market Outcomes I Important role for govt enforce property rights with police courts I People are less inclined to work produce invest or purchase if large risk of their property being stolen TEN PRINCIPLES OF ECONOMICS 19 HOW PEOPLE INTERACT Principle 7 Governments Can Sometimes Improve Market Outcomes I Market failure when the market fails to allocate society s resources efficiently I Causes I Externalities when the production or consumption of a good affects bystanders eg pollution I Market power a single buyer or seller has substantial influence on market price eg monopoly I In such cases public policy may promote efficiency TEN PRINCIPLES OF ECONOMICS 20 HOW PEOPLE INTERACT Principle 7 Governments Can Sometimes Improve Market Outcomes I Govt may alter market outcome to promote equitv I Ifthe market s distribution of economic wellbeing is not desirable tax or welfare policies can change how the economic pie is divided TEN PRINCIPLES OF ECONOMICS 21 ACTIVE LEARNING 2 Discussion Questions In each of the following situations what is the government s role Does the government s intervention improve the outcome a Public schools for K 12 b Public highways 22 Wag f W AS WHCQL W QRKS HOW THE ECONOMY AS A WHOLE WORKS Principle 8 A country s standard of living depends on its ability to produce goods amp services Principle 9 Prices rise when the government prints too much money Principle 10 Society faces a shortrun tradeoff between inflation and unemployment TEN PRINCIPLES OF ECONOMICS 2 The principles of decision making are I People face tradeoffs I The cost of any action is measured in terms of foregone opportunities I Rational people make decisions by comparing marginal costs and marginal benefits I People respond to incentives 25 The principles of interactions among people are I Trade can be mutually beneficial I Markets are usually a good way of coordinating trade I Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable 26


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