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Economics Week 2 Notes

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by: Daniel Ochs

Economics Week 2 Notes econ 1

Daniel Ochs

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Principles of Economics (Chapter 1)
Principles of Economics
Class Notes
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This 3 page Class Notes was uploaded by Daniel Ochs on Friday April 1, 2016. The Class Notes belongs to econ 1 at University of California - Los Angeles taught by Convery in Spring 2016. Since its upload, it has received 40 views. For similar materials see Principles of Economics in Economcs at University of California - Los Angeles.


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Date Created: 04/01/16
Tuesday, April 5, 2016 Week 2 10 Principles of Economics - Scarcity- the limited nature of society’s resources I. What Economics is all about - Economics- the study of how society manages its scarce resources • Different perspectives make up marketplace - Individuals, Companies, and Society II. Big Ideas A. Incentives Matter • Incentives- something that induces a person to act - prospect of a reward or punishment - responding to incentives B. Markets are usually a good way to organize economic activity • Market- A group of buyers and sellers (need not be in a single location) - “organize economic activity”: what (goods to produce), how (to produce them), how much (of each to produce), who (gets them) • Invisible hand works through price C. People face tradeoffs • All decisions involve some sort of tradeoff • Central Idea: society faces an important tradeoff: efficiency vs equality - Efficiency- when society gets the most from its scarce resources - Equality- when prosperity is distributed uniformly among society’s members D. Rational people think at the margin • Rational people- systematically and purposefully do the best they can to achieve their objectives 1 Tuesday, April 5, 2016 - make decisions by evaluating cost and benefits or marginal changes E. The power of trade • Rather than being self-sufficient, people can specialize in producing one food or service and exchanging it for other goods • Central Idea: Trade can make everyone better off F. The importance of wealth and economic growth • Central Idea: A country’s standard of living depends on its ability to produce goods and services • Central Idea: The most important determinant of living standards is productivity G. Institutions Matter • Central Idea: The Important role for government is to enforce property rights - People are less willing to take on risk without protection • Market failure- when the market fails to allocate society’s resources efficiently - Causes of market failure: • Externalities: when the production or consumption of a good affects bystanders [pollution] • Market power: a single buyer or seller has substantial influence on market place [monopoly] • Central Idea: Public policy may promote efficiency Central Idea: Government may alter market outcome to promote equity • H. Economic booms and bursts cannot be avoided but can be moderated • Central Idea: Policymakers use Fiscal Policy and Monetary Policy to attempt to smooth out this economic volatility - Fiscal policy: the use of government revenue (taxation) and expenditure (spending) to influence the economy - Monetary policy: the process by which the government controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability 2 Tuesday, April 5, 2016 I. Prices rise when the government prints too much money • Inflation- increase in the general level of prices - inflation is excessive quantity of money making quality (value) less J. Central banking is a hard job • Central Idea: Society faces a short-run tradeoff between inflation and unemployment • The Federal Reserve (the “Fed”) is the U.S.’s central bank III. Summary - The principles of decision making are: • People face tradeoffs The cost of any action is measured in terms of foregone opportunities • • Rational people make decisions by comparing marginal costs and marginal benefits • People respond to incentives - The principles of interactions among people are: • Trade can be mutually beneficial • Markets are usually a good way of coordinating trade • Government can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable - The principles of the economy as a whole are: • Productivity is the ultimate source of living standards • Money growth is the ultimate source of inflation • Society faces a short-run tradeoff between inflation and unemployment 3


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