Chapter 1 Notes
Chapter 1 Notes Econ 20A
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This 7 page Class Notes was uploaded by Ebony Bell on Sunday October 18, 2015. The Class Notes belongs to Econ 20A at University of California - Irvine taught by RODRIGUEZ LOPE, J. in Fall 2015. Since its upload, it has received 12 views.
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Date Created: 10/18/15
ECON 20A FALL QUARTER 2015 INSTRUUOR RODRIGUEZ ebonybeudedu 21 September 2015 CHAPTER 1 Introduction Economy comes from the Greek word oikonomos one who manages household Like a household society faces many decisions The management of these decisions is important because society s resources are scarce limited Economics is the study of how society manages its scarce resources economist study how people make decisions How People Make Decisions I Principle 1 People Face TradeOffs A To get something we want we usually have to give something else up Ex A student deciding between spending their time studying watching TV and hanging out with friends 1 Guns and butter The more a society spends on national defense from foreign forces guns the less it can spend on consumer goods butter and the standard of living at home 2 Tradeoff between clean environment and high income Reducing pollution to benefit the environment means higher production costs and lower wages for workers B Efficiency and Equality 1 Efficiency gt society is getting maximum benefits from scarce resources 2 Equality gt societal benefits are distributed equally among societal members a Gov t policies such as welfare and unemployment insurance try to help those in need while the financially successful contribute from individual income tax This is not efficient because this reduces the reward for working hard so people work less and produce less goods Principle 2 The Cost of Something is What You Give Up To Get It A Making a decision requires you to be aware of the opportunity cost what you have to give up to get that item 1 Example Choosing to go to college will make you eligible for betterjobs but the time you spend in college you could have been earning wages Also the money you have to spend on books tuition and fees room and board and food are additional costs I Principle 3 Rational People Think at the Margin A Rational people do the best they can to achieve their goals when given the opportunity They know that decisions in life are multifaceted and make marginal changes small incremental adjustments around the edges of an existing plan gt marginal means edges 1 Rational people make changes based on marginal changes and marginal costs 2 Marginal benefit vs marginal cost You have a fixed 40 fee for your cell phone and an additional 050 per minute ifyou talk on the phone for 100 minutes your bill is 90 You reason that a 10 minutes call is worth 9 however you value a 10 minute conversation on the phone with your friend at 7 In this case the marginal benefit or 7 is greater than the marginal cost which is 5 instead of 9 because the base rate of 40 is not accounted as a marginal cost it exists no matter how long you talk on the phone B Thinking a the margin works best for business decisions 1 Why are diamond more expensive than water People need water to survive but not diamonds however they are willing to pay more for a diamond than for a cup of water This is because water is plentiful but diamonds are rare so people consider the marginal benefit of an extra diamond to be larger than an extra cup of water IV Principle 4 People Respond to Incentives A Rational people respond to incentives something that inducesinfluences someone to act Incentives are important when analyzing how markets work 1 If the price of an apple goes up people buy fewer apples while the orchard hires more workers to try to produce more apples Buyer39s incentive is to buy less while the seller39s incentive is to produce more B Policy makers should always be looking at incentives 1 Higher tax on gas makes people want to drive smaller cars electric cars take public transit and carpool C When policymakers fail to look at incentives they end up with unexpected consequences 1 Legislation to make drivers and passengers wear seat belts actually makes people drive more recklessly because they thought that their seat belts would make them less likely to be in an accident How People Interact I Principle 5 Trade Can Make Everyone Better Off A Trade between two countries can actually make each of them better off Trade allows each country to specialize in something they do best and still ensure that they have a variety of goods and services at a lower cost II Principle 6 Markets Are Usually a Good Way to Organize Economic Activity A Countries that once had centrallyplanned communist or communistlike economies are developing market economies economies that allocate resources through the decentralized decisions of many firms and households as they interact in markets for goods and services 1 It is surprising that market economies work because no one is looking out for the wellbeing or society as as a whole B In An Inquiry into the Nature and Cause of Wealth of Nations 1 776 Adam Smith stated that households and firms interact in the market as if they are guided by an quotinvisible handquot 1 Prices are the instrument that the invisible hand guides the market with and leads the market to desirable outcomes 2 When the gov39t prevents prices from rising naturally to adjust to supply and demand it messes up the invisible hand39s ability to coordinate the decisions of households and firms a This explains why taxes negatively affect the allocation of resources and why communism failed I Principle 7 Governments Can Sometimes Improve Market Outcomes A The invisible hand only works if the government enforces the rules and maintains the institutions that are key to a market economy Market economies need institutions to enforce property rights the ability of an individual to own and exercise control over scarce resources so individuals can own and control scarce resources The invisible hand counts on our ability to enforce our rights 1 A farmer won t grow crops ifthey will be stolen a restaurant won t serve food if it isn t assured the customers have to pay before leaving B The gov t is also needed to promote efficiency or promote equality 1 Efficiency Marketfailure when the market can no longer produce an efficient allocation of resources a One possible cause of market failure is externality the impact of one person s actions on the well being of a bystander which includes factors such as pollution b Another possible cause of market failure is market power the ability of a single person or firm or a small group to unduly influence markets which includes factors such as monopolies 2 Equality A market economy rewards people according to their ability to produce things that people are willing to pay for The invisible hand does not ensure that everybody has sufficient food decent health care ect Public policies such as welfare and income tax are ways that that the gov t intervenes for the sake of equality C Even though the gov t can improve market outcomes it does not mean that it always will How the Economy Works as a Whole I Principle 8 A Country s Standard of Living Depends on Its Ability to Produce Goods and Services A There are vast differences in the living standards around the world in 2011 the average American made a salary of 48k while the average Nigerian made 1 2k this is because citizens of high income countries have more TV sets more cars better nutrition ect 1 In the US incomes have grown about 2 percent each year which means the the average income doubles every 35 years B Almost all variation in living standards are attributed to the differences in a country s productivity the amount of goods and services per hour In nations where workers are less productive the citizens endure a more meager existence The growth rate of a nation s productivity determines the growth rate of its average income C The relationship between productivity and living standards has connections with public policy To boost living standards policymakers have to improve productivity by ensuring the workers ra educated and have the resources they need to produce good and services and have access to the best technology D Productivity is the primary determinant for living standards and other explanations such as credit labor unions minimum wage laws or competition with other countries are secondary explanations Principle 9 Prices Rise When the Gov t Prints Too Much Money A Inflation an increase in the overall level of prices in the economy is caused by the amount of money that is produced When the gov t produces large quantities of money the value ofthe money falls causing the price of goods and services to rise 1 InJanuary 1921 the price ofa newspaper in Germany was 030 marks less than two years later in November 1922 the price of a newspaper was 70000000 marks Principle 10 Society Faces a ShortRun Tradeoff between Inflation and Unemployment A Increasing the amount of money in circulation stimulate the overall economy by increasing the demand for goods and services which causes firms to raise their prices over time and hire new workers which leads the less unemployment 1 Gov t has a shortrun tradeoff between inflation and unemployment which plays a key role in the the analysis ofthe business cycle the irregular and unpredictable fluctuations in economic activity as measured by the production of goods and services or the number of people employed Policymakers can exploit the shortrun tradeoff between inflation and unemployment using various policy instruments such as influencing the demand for good and services which can influence the combination of inflation and unemployment the amount of money the gov t spends or the amount it taxes 1 Because these instruments of economic policy are so potentially powerful how policymakers use them are still a subject of debate a At the beginning of President Obama s first term as a way to ease the problems in the financial system he initiated a stimulus package of reduced taxes and increased gov t spending just as the Federal Reserve increased the supply of money The goal ofthis policy was to reduce unemployment Conclusion Key Concepts scarcity gt the limited nature of society s resources B economics gt the study of how society manages its scarce resources efficiency gt the property of society getting the most it can from its scarce resources equality gt the property of distributing economic prosperity uniformly among the members of society opportunity cost gt whatever must be given up to obtain some item rational people people who systematically and purposefully do the best they can to achieve their objectives marginal change gt the small incremental adjustment to a plan of action incentive gt something the induces a person to act market economy gt an economy that allocated resources through the decentralized decisions of many firms and households as the interact in markets for goods and services property rights gt the ability of an individual to own and exercise COHtFOI over scarce FGSOUFCGS market failure a situation in which a market left on its own fails to allocate resources effectively externality gt the uncompensated impact of one person s action on the wellbeing of a bystander market power the ability of a single economic actor or a small group of actors to have a substantial influence on market prices productivity gt the quantity of goods and services produced from each unit of labor input inflation gt an increase in the overall level or prices in the economy business cycle gt fluctuations in economic activity such as employment and production