Microeconomic Principles Econ 103
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This 10 page Class Notes was uploaded by Junior Yost on Monday September 28, 2015. The Class Notes belongs to Econ 103 at George Mason University taught by James Bennett in Summer 2015. Since its upload, it has received 29 views. For similar materials see Microeconomic Principles in Economcs at George Mason University.
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Date Created: 09/28/15
Chapter 1 The Economic Approach Econ 103 What is Economics About Scarcity Means Having to Make Choices Scarcity Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like Choice The act of selecting among alternatives Resources Input used to produce economic goods 0 Ex land labor skills natural resources capital 0 Human resources the productive knowledge skill and strength of human beings physical resources tools machines and buildings that enhance our ability to produce goods Capital humanmade resources used to produce other goods and resources 0 natural resources land mineral deposits oceans and rivers O Scarcity and Poverty Are Not the Same Objective Fact based on observable phenomena that s not influenced by differences in personal opinion Subjective Opinion based on personal preferences and value judgments Scarcity Necessitates Rationing Rationing Allocating a limited supply of a good or resource among people who would like to have more of it Scarcity Leads to Competitive Behavior Competition is natural outgrowth of scarcity and desire of human beings to improve their conditions Encourages discovery and innovation The Economic Way of Thinking Economic Theory Set of definitions postulates and principles assembled in a manner that makes clear the causeandeffect relationships Eight Guideposts to Economic Thinking 1 Iquot 9quot 45 9quot 0391 00l Positive The use of scarce resources is costly so decision makers must make tradeoffs i Opportunity cost the highest valued alternative that must be sacrificed as a result of choosing an option Individuals choose purposefully they try to get the most from their limited resources i Economizing Behavior choosing the option that offers the greatest benefit at the least possible cost Utility Subjective benefit or satisfaction a person expects from a choice or course of action Incentives matter choice is influenced in a predictable way by changes in incentives Individuals make decisions at the margin i Marginal term used to describe the effects of a change in the current situation ii Marginal benefit vs Marginal cost Although information can help us make better choices its acquisition is costly Beware of the secondary effects economic actions often generate indirect as well as direct effects i Secondary Effects Indirect impact of an event or policy that may not be easily and immediately observable The value of a good or service is subjective The test of a theory is its ability to predict i Scientific Thinking developing a theory from basic principles and testing it against events in the real world and Normative Economics Positive Economics scientific study of what is among economic relationships o Normative Economics judgments about what ought to be in economic matters Pitfalls to Avoid in Economic Thinking Violation of the Ceteris Paribus Condition 9 Wrong Conclusion o Ceteris Paribus Latin other things constant that is used when the effect of one change is being described recognizing that if other things changed they also could affect the result Good Intentions Do Not Guarantee Desirable Outcomes Association Is Not Causation o Statistical association along cannot establish causation The Fallacy of Composition What s True for One Might Not Be True for All o Fallacy of Composition erroneous view that what is true for the individual or component will also be true for the group whole o Microeconomics the branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units o Macroeconomics focuses on how human behavior affects outcomes in highly aggregated markets 8302010 110400 AM Chapter 2 Some Tools of the Economist Econ 103 What Shall We Give Up Opportunity Cost o The highest valued alternative sacrificed in order to choose an option Opportunity Cost and the Real World o Opportunity costs change with time and circumstances Trade Creates Value 1 When individuals engage in a voluntary exchange both parties are made better off 2 By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources Transaction Costs A Barrier to Trade o Transaction Costs The time effort and other resources needed to search out negotiate and complete an exchange 0 High transaction costs can be a barrier to potentially productive exchanges The Middleman as a Cost Reducer o Middleman a person who buys and sells goods or services or arranges trade reduces transaction costs 0 Ex grocers auto dealers The Importance of Property Rights o Property Rights the rights to use control and obtain the benefits from a good our resource o Private Property Rights Property rights that are exclusively held by an owner and protected against invasion by others can be transferred sold or mortgaged at the owner s discretion o Private property incentives 0 Private owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others 0 Private owners have a strong incentive to care for and properly manage what they own 0 Private owners have an incentive to conserve for the future particularly if the property is expected to increase in value 0 Private owners have an incentive to lower the chance that their property will cause damage to the property of others Private Ownership and Markets o Provide foundation for cooperative behavior among individuals Production Possibilities Curve o Production Possibilities Curve curve that outlines all possible combinations of total output that could be produced assuming 1 a fixed amount of productive resources 2 a given amount of technical knowledge and 3 full and efficient use of those resources The slope of curve indicates the amount of one product that must be given up to produce more of the other Shifting the Production Possibilities Curve Outward There are four factors that could potentially shift the production possibilities curve outward 1 An increase in the economy s resource base would expand our ability to produce goods and services i Investment the purchase construction or development of resources including physical assets such as plants and machinery and human assets such as better education Investment expands the economy s resources 2 Advancements in technology can expand the economy s production possibilities 39 Technology the technological knowledge available in an economy at any given time The level of technology determines the amount of output we can generate with limited resources Invention the creation of a new product or process often facilitated by the knowledge of engineering and science Innovation the successful introduction and adoption of a new product or process the economic application of inventions and marketing techniques iv Entrepreneur a person who introduces new products or improved technologies and decides which projects to undertake v Creative Destruction the replacement of old products and production methods by innovative new ones that consumers judge to be superior The process generates economic growth and higher living standards 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 Production Possibilities and Economic Growth o Within PPCPPF economic growth is an outward shift in the curve o Economic growth is very important in modern economics Trade Output and Living Standards o Division of Labor a method that breaks down the production of a product into a series of specific tasks each performed by a different worker Gains from Specialization and Division of Labor o Law of Comparative Advantage a principle that states that individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply at a low opportunity cost and exchanging them for goods that they cannot produce cheaply at a high opportunity cost Gains from Mass Production Methods o Trade promotes economic progress by making it possible for firms to lower perunit costs with mass production 0 International trade 9 mass production Gains from Innovation o Trade makes possible to realize gains from the discovery and dissemination of innovative products and productive processes 0 Observing and interacting with other people using differentbetter technology encourage others to copy successful approaches Human Ingenuity and the Creation of Wealth o In a market economy larger income for one person does not mean a smaller income for a trading partner Economic Organization o Every economy faces three questions 0 What will be produced 0 How will it be produced 0 For whom will it be produced Market Organization o Market Organization method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices o Capitalism an economic system in which productive resources are owned privately and goods and resources are allocated through market prices Political Planning Collective Decision Making the method of organization that relies on publicsector decision making voting political bargaining lobbying and so on to resolve basic economic questions Socialism a system of economic organization in which 1 the ownership and control of the basic means of production rests w the state and 2 resource allocation is determined by centralized planning rather than market forces 8302010 115600 AM
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