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Date Created: 09/15/15
Pop Quiz Guideline For Chapters 1 amp 2 FALL SEMESTER 2015 INSTRUCTOR Yu Liu 14 September 2015 Chapter 1 First Principles Individual Choice 1 Choices are necessary because resources are scarce Resource anything that can be used to produce something else Scarce in short supply a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it 2 The true cost of something is its opportunity cost Opportunity cost what you must give up in order to get something 3 quotHow muchquot is a decision at the margin Tradeoff comparison of the costs and the bene ts of doing something ex Each bite of the candy bar has costs and bene ts Marginal decision decision made at the margin of an activity about whether to do a bit more or a bit less of the activity Marginal analysis the study of marginal decisions Incentive anything that offers rewards to people who change their behavior 4 People usually respond to incentives exploiting opportunities to make themselves better off Interaction and Individual Choice 5 There are gains from trade Trade allows us all to consume more than we otherwise could Specialization the situation in which each person specializes in the task that he or she is good at performing 6 Markets move toward equilibrium Equilibrium an economic situation in which no individual would be better off doing something different Ex Lane speed reach equilibrium quickly as people respond to incentives 7 resources should be used ef ciently to achieve society s goals Ef cient taking all opportunities to make some people better off without making other people worse off Equity a condition in which everyone gets his or her quotfair sharequot Ex Equity trumps ef ciency in disabled parking space offering 8 Markets usually lead to ef ciency people normally take opportunities for mutual gain 9 When markets don t achieve ef ciency government intervention can improve society s welfare Ex Sometimes markets fail and need correction Economy Wide Interactions 10 One person s spending is another person s income During recessions a drop in business spending leads to Less income less spending and further drops in business spending layoffs and rising unemployment 11 Overall spending sometimes gets out of line with the economy s productive capacity 12 Government policies can change spending Ex The US government funded the WPA and provided almost 8 million jobs between 1935 and 1943 Chapter 2 Economic Models Trade Offs and Trade Models In Economics Model a simpli ed representation of a real situation that is used to better understand real life situations quotOther Things Equalquot Other things equal assumption all other relevant factors remain unchanged The PPF is a diagram that shows the combinations of two goods that are possible for a society to produce at full employment TradeOffs The PPF All points under the curve are feasible but not ef cient And all points above the curve are not feasible All points on the curve are feasible and ef cient Ef ciency If the economy as a whole could not produce more of any one good without producing less of something else that is if it is on its production possibility frontier then we say that the economy is ef cient in production Requires that the economy allocate its resources so that consumers are as well off ass possible If an economy does this we say that it is ef cient in aHoca on All points under the curve are feasible And all points above the curve are not feasible All points on the curve are feasible and ef cient Opportunity Cost Opportunity cost what must be given up in order to get a good What Causes Economic Growth Two Possibilities 1 An increase in factors of production resources used to produce goods and services 2 Better technology the technical means for producing goods and services Factors Of Production 1Land Natural resources such as mineral deposits 0 natural gas water and actual and acreage 2Labor Mental and physical abilities of the workforce 3 Physical capital Manufactured items used to produce other goods and services Economic Resources 4 Human Capital Educational achievements and skills of the labor force which increase labor productivity Comparative advantage and gains from trade Theory of Comparative Advantage It makes sense to produce the things you39re especially good at producing and buy everything else from others Origin Of The Idea David Ricardo 1772 1823 Argued against Corn Laws in British Parliament Corn Laws high tariffs on imported grain that protected British landowners His theory of comparative advantage is still the ideological foundation for free trade