Chapter 2 9/2/15-9/9/15
Chapter 2 9/2/15-9/9/15 Eco2013
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This 4 page Class Notes was uploaded by Danielle Sturgeon on Tuesday September 15, 2015. The Class Notes belongs to Eco2013 at Florida State University taught by Calhoun in Summer 2015. Since its upload, it has received 13 views. For similar materials see Macroeconomics in Business at Florida State University.
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Date Created: 09/15/15
Chapter 2 Some Tools of the Economist 1 What Shall We Give Up a Scarcity means that we can t have everything we want b We constantly face choices that involve tradeoffs c Opportunity Cost i The choice to do one thing is at the same time a choice not to do another thing ii The highest valued alternative sacri ced in order to choose an option is called the opportunity cost of that choice 2 Trade Creates Value a The value of goods and services generally depends on who uses them b Two opposing views of trade i When people trade one person gains and the other person oses ii When people trade both parties gain 1 In this instance trade creates wealth c When individuals engage in a voluntary exchange both parties are made better off i Voluntary trade is expected to bene t both parties involved otherwise it wouldn t occur d By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources i The value of an item can vary greatly from one person to another ii Material things are not wealth until they are in the possession of someone who values them e Transaction Costs The time effort and other resources needed to search out negotiate and complete an exchange i Sometimes vauabe trades will not take place because of high transaction costs ii Gains from trade can go completely unrealized if the person does not think the transaction costs are worth it 3 The Importance of Property Rights a Two kinds of property rights i Common rights everybody or a large group owns it ii Private rights only one person or a small group owns it b Privateproperty rights involve three things i The right to exclusive use of the property C d ii Legal protection against invasion from people who could use or abuse the property without permission iii The right to transfer sell exchange or mortgage the property Incentives created by property rights i Give proper care to property 1 Being careless about taking care of private property lessens its value to both the current and any future owner ii Conserve for the future 1 Private owners have an incentive to conserve for the future particularly if the property is expected to increase in value iii Use resources in ways other people value as to increase your chances of wealth 1 Private owners can gain by employing their resources in ways that are bene cial to others and they bear the opportunity cost of ignoring the wishes of others iv Mitigate possible harm to others to avoid lawsuit 1 Private owners have an incentive to lower the chance that their property will cause damage to the property of others because if it does then they will be to blame Private Ownership and Markets i Private ownership and competitive markets provide the foundation for cooperative behavior among individuals ii Market prices give private owners a strong incentive to consider the desires of others and use their resources in ways others value 4 Production Possibilities Curve a an A curve that outlines all possible combinations of total output that could be produced assuming three things i A xed amount of productive resources ii A given amount of technical knowledge iii Full and efficient use of those resources The slope of the curve indicates the amount of one product that must be given up to produce more of the other Points on the curve efficient points Points under inside the curve inefficient points i Not using resourcestime wiselycompletely Points outside of the curve unattainable points i You do not have enough moneytimeresources to reach these points Curve shifting i Curve can shift outward as an indicator of growth producing more 1 An increase in the economy s resource base would expand our ability to produce goods and services 2 Advancements in technology can expand the economy s production possibilities 3 An improvement in the rules under which the economy functions can also increase output 4 By working harder and giving up current leisure we could increase our production of goods and services ii Curve could shift inward as an indicator of negative growthregression not usually a possibility very rare 5 Trade Output and Living Standards a Trade makes it possible for people to generate more output through specialization and division of labor largescale production processes and the dissemination of improved products and production methods i Moves goods from people who value them less to people who value them more b Division of Labor i A method that breaks down the production of a product into a series of speci c tasks each performed by a different worker ii This method allows for more efficiency and a lower production cost c Law of Comparative Advantage i Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost 1 Do what you do best and trade for the rest 6 Human Ingenuity and the Creation of Wealth a Human Ingenuity Economic goods are the result of human ingenuity and action thus the size of the quoteconomic piequot is variable not xed i The size of a country s quoteconomic piequot is most easily thought of as the total dollar value of all goods and services produced during some period of time ii When a person earns income he or she expands the economic pie by more than the amount of the slice that he or she gets making it possible for the rest of us to have a bigger slice too 7 Economic Organization a Every economy faces three basic questions i What will be produced ii How will it be produced iii For whom will it be produced b Market Organization i A method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices ii Also known as capitalism An economic system in which productive resources are owned privately and goods and resources are allocated through market pdces iii In markets individual buyers and sellers communicate their desires and preferences both directly and indirectly
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