Chapter 1 Ten Principles of Economy Pt. 2
Chapter 1 Ten Principles of Economy Pt. 2 ECON 201
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This 2 page Class Notes was uploaded by Lori Richardson on Tuesday September 15, 2015. The Class Notes belongs to ECON 201 at Louisiana Tech University taught by Hung Nguyen in Fall 2015. Since its upload, it has received 76 views. For similar materials see Economic Principles and Problems in Economcs at Louisiana Tech University.
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Date Created: 09/15/15
Continuation of Ch1 Notes 4 People respond to incentives Incentive something that induces a person to act Ex If the prices of apples increase while everything else on the market remains constant then the consumer will buy fewer apples 5 Trade can make everyone better off Ex US trade with Canada US wants syrup from Canada Canada wants carstechnology from the US 0 Trades allows countriesfamilies to specialize in what they do best and to enjoy a greater variety of good and services 6 Markets are usually a good way to organize economic activity 0 In a FREE MARKET economy the decisions of a central planner are replaced by those of individuals and rms Hence when a gov t interferes in a market and prevents price from adjusting household and rm decisions become distorted o This results in the idea of quotInvisible Handsquot 7 Gov t can sometimes improve market outcomes 0 The quotInvisible Handquot idea by Adam Smith in 1776 o This idea works best if the gov t enforces property rights ability of an individual to own and exercise control over scarce resources 0 Two reasons for the gov t to interfere with the economy efficiency and equality Gov t can improve efficiency and equality when there is market failure Market failure could mean issues with the following Market power monopoly Negative externalities Public goods Incomplete information A country s standard of living depends on it s ability to produce goods and services The explanation for differences in living standards lies in differences in productivity Higher productivity implies a higher standard of living 9 Prices rise when gov t prints too much money 10 When the gov t prints a large amount of money the value of it falls resulting in a price increase l In ation Society faces a Short Run Trade Off between in ation and unemployment An increase in the amount of money in the economy stimulates spending and increases the quantity of goods and services sold Firms then hire more employees resulting in a decrease of unemployment Policymakers can exploit this tradeoff by using various policy instruments
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