Economics Notes

Chapter 1


Economics is based on different issues, one of them is Individual Choice.
Individual Choice: Choices that individuals make. Ex/ saving money to take a
bus instead of a car.
Economic Interaction: How my choices affect your choices, vice versa.
Economy: Coordinating activities that create goods and services people want
and get them to the people who want them.
Economics: the social science that studies the production, distribution, and
consumption of goods and services.
Market Economy: Free will of people. People decide.
Command Economy: Central government decides, telling people what to
produce or where to ship it.
Invisible Hand: If we have our own interest can benefit our society in our
economy.
Microeconomics: (small picture) focusing on one individual on how their self
interest will benefit society.
Market Failure: When individuals make bad choices that affect the
economics. Ex/ water and air pollution.
Recession: A downfall in the economy.
Macroeconomics: (big picture) Concerned with the whole society how it
affects economy. The overall of ups and downs in the economy.
Economic growth: The ability to produce and goods and services.
Steps for Individual Choice:
1.)People must make choices because resources are scarce.
-Resource: Anything that can be used to produce something else.
-Land
-Labor (people)
-Capital (machinery)
-Human capital (entrepreneurship)
-Scarce- Not enough resources to satisfy the demand.
2.)Opportuinity Cost: The next best alternative.
-Monetary Cost: An additional expense.
3.)How much is a decision at the margin.
-Trade Off: A comparison of costs and benefits. Ex/test tomorrow verse
party. Instead of studying you go to the party. Your trading off your study
time for your part.
-Marginal Decisions: Whether to do a bit more or a bit less of a activity.
Ex/test tomorrow morning verse show tonight. You would study a bit less in
order to watch your show on time.
4.) Exploiting (Taking Advantage) Opportunities to make themselves better
-Incentives: Anything offered to you that makes people change behaviors.
Ex/If I told my sister to clean my room for $20, the driving force is money.
-Interaction: How my choices affect your choices, vice versa. Ex/Gas stations
verse Wal-Mart. No one will be interested to get stuff from gas station
because Wal-Mart is so big its hard to compete for them.
5.) Trade: Provide goods to others and receive goods in return.
-Gains From Trade: People get farther ahead if they work together.
-Specialization: One person specializes at a certain task
6.) Equilibrium: When no individual would be better off doing something
different.
-Because people respond to incentives, markets move toward equilibrium.
Ex/ when there is a change, the situation moves to an equilibrium.
7.)Markets Usually Lead to Efficiency
-Efficient: Takes all opportunities to make some people better off without
making other people worse. Ex/ if there is a big class with a small classroom
they are exploiting there opportunities right because theres a bigger
classroom.
-Resources should be used as efficiently as possible to achieve societys goals.
-Equity: Fairness
-Policies that promote equity often come at a cost of decreased efficiency in
the economy, and vice versa. Ex/Handicap Parking spaces are fair to people
with disabilities but unfair to others who dont have disabilities and when no
one is parked there. We get in trouble and fined.
8.) Because people usually exploit gains from trade, markets usually lead to
efficiency.
9.) When markets dont achieve efficiency, government intervention can
improve society welfare by imposing new policies.
-Three ways they fail:
1.Individual actions. Ex/pollution
2.An individual preventing resources to be distributed equally to get profit
out of it. Ex/medication that is unaffordable. They overpricing it to get profit.
3.Unsuited for efficient management. Ex/Air traffic control.
10.) One persons spending is another persons income.
-If you dont spend other people dont earn and vice versa.
11.) Overall spending sometimes gets out of line with economys productive
capacity. Ex/ Great depression. Economy was poor, high unemployment, they
raised prices to find willing customers.
-Inflations- Raising prices due to the economic downfall.
12.) Government policies can change spending
-Collects more public taxes, & the control of money (macroeconomic policy)