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Week 1: chapter 1&2Economy: all the production and exchanges that take place.
Economics: the study of how society manages its scarce(limited) resources.
All economic questions arise because we want more than we can get:
- Scarcity: Our inability to satisfy all our wants is called
- Incentive: a reward that encourages an action or a penalty that
discourages an action.
Economics is divided in two main parts:
- Microeconomics: the study of choices that individuals and businesses
make, the way those choices interact in markets, and the influence of
governments.
- Macroeconomics: the study of the performance of the national and
global economies.
How do people make decisions:
Six key ideas define the economic way of thinking:
- People face tradeoff: an exchange—giving up one thing to get
something else. Trading off the benefits of one thing against those of
another.
An important trade-off is between efficiency and equity:
,Efficiency: our capacity to get the most from the society’s scarce sources.
Equity: the extent to which the benefits of outcomes are distributed fairly
among society’s members.
- Making a rational choice:
A rational choice is one that compares costs and benefits and achieves the
greatest benefit over cost for the person making the choice.
- Benefit: what you GAIN
The gain or pleasure that it brings and is determined by preferences.
- Cost: What You Must Give Up
The opportunity cost is the highest valued alternative that must be given up to
get it. Measure of the options sacrificed in making a decision.
The opportunity cost of Y: sacrifice of good x/ gain in good Y.
- Choosing at the Margin
A choice at the margin is a decision to do a little more or a little less of
something based on the comparison 0f benefit.
Marginal changes -> small incremental adjustments to a plan of action
Economic agent -> an individual, firm or organization that has an impact in
some way on an economy.
,Marginal cost -> the opportunity cost of pursuing an incremental increase in
an activity.
Marginal benefit -> The benefit from pursuing an incremental increase in
an activity
Marginal analysis -> Analysis that involves comparing marginal benefits
and marginal costs.
Market: A group of buyers and sellers of a good or service and the institution
or arrangement by which they come together to trade.
In analyzing markets, we generally assume:
1. People are rational
Rational consumers and firms weigh the benefits and costs of each action and
try to make the best decision possible.
2. People respond to economic incentives
As incentives change, so do the actions that people will take
3. Optimal decisions are made at the margin.
Most decisions involve doing a little more or a little less of something.
, Efficiency of Market Economies
Market economies promote:
- Productive efficiency: a situation in which a good or service is
produced at the lowest possible cost; and
- Allocative efficiency: a state of the economy in which production is
in accordance with consumer preferences.
Governments Can Sometimes Improve Market Outcomes
Market failure: when the market fails to allocate society’s resources
efficiently.
Causes:
- Externalities: when the production or consumption of a good affects
bystanders (e.g. pollution).
- Market power: a single buyer or seller has substantial influence on
market price
Economists play two roles:
- Scientists: try to explain the world
- Policy advisors: try to improve it.
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