Considder the production model x = Cx + d for an economy with two sectors, where
Use an inverse matrix to determine the production level necessary to satisfy the final demand.
Econ 202 ~ Chapter 1 ~ 10 Principles of Marco-Economics HOW PEOPLE MAKE DECISIONS 1. People face trade-offs ~ because resources are scarce between alternative items, choices are necessary Trade-offs between efficiency & equality when grouped into a society Asks: “What” or “which” to do 2. The true cost of something is what you give up to get it ~ it’s measured in forgone opportunity costs. Measuring the costs and benefits of giving up something else for an item 3. Rational people think at the margin ~ is decision-making at the edge or at a limit Intuitively comparing marginal benefits to marginal costs Asks: “How much of” is a decision at the margin At the “edge” is measured in one (1) unit When MB > MC ~ Take Action / When MB < MC ~ Don’t Take Action 4. People respond to incentives ~ induces a person to act (effect & change behavior) People exploit opportunities to make themselves better off Something that induces a person to act via a reward or punishment Efficiency ~ is when society gets its most out of its scarce resources. (Size of the pie) Equality ~ is when prosperity is distributed uniformly amongst society’s members. (How the pie is divided) Rationale People ~ are people who systematically and purposefully do the best they can to achieve their objectives. Market Economy ~ is the allocation of resources as many households and many firms interact with each other within the markets. HOW PEOPLE INTERACT 5. Trade can make everyone better off ~ through and because of specialization Getting a better price from selling one’s product abroad which is produced at home (Export) Buying other goods more cheaply from abroad than can be produced at home (Import) People/firms/countries produce goods and services that they are proficient in 6. Markets are usually (mostly) a good way to organize economic activity via a market economy Markets create efficiency Acts as an invisible hand even though self-interest(s) is involved Resources are allocated through the decentralized decisions of many households and many firms as they interact within the market economy (the invisible hand) Supply curve is related to the marginal cost Demand curve is the willingness of consumers to pay a given price Markets move towards equilibrium and then no further adjustments will occur 7. Governments can sometimes improve market outcomes ~ through their 3 policies: Ensuring and enforcing property rights ~ because people are less inclined to work, produce, invest or purchase if a large portion of their property is stolen Intervening in and correcting Market failures ~ market failure is when the production or consumption of a good or service affects bystanders 1. When there’s inefficient allocation of resources because of market power and dead-weight loss created by monopolies or other factors 2. When Externalities effect the well-being of others Negative externality is pollution Positive externalities are bees (pollination) and education Promoting equality over efficiency 1. Taxes or welfare policies can change how the economic pie is divided HOW THE ECONOMY AS A WHOLE WORKS There is a huge variation in living standards across countries over time. Average income in the richest countries is 10 times more than poor countries. The US standard of living is 10 times bigger than it was 100 years ago. 8. A country’s standard of living depends on its ability to produce goods and services Productivity is the ultimate source of living standards and depends upon the equipment, skills and technology available to workers Labor unions and competition from abroad has less of an effect 9. Prices rise when government prints too much money Inflation is almost always caused by excessive growth in the quantity of money which in turn causes the value of money to fall. The faster the government creates money, the greater the inflation rate. (In the long-run which is greater than 3 years) 10.Society faces a short-run (1 to 2 year period) trade-off between inflation and unemployment Business cycle ~ fluctuations in economic activity; such as, employment, production and growth Inflation occurs when money supply increases and unemployment is down