Microeconomics â Notes from Text
Microeconomics – Notes from Text Chapter 1 – Ten Lessons from economics
•
•
Economists study how individuals make decisions, how they interact with each other and the factors that affect the economy as a whole. 10 Lessons o People face trade-offs § Give up with one to get another – due to scarcity • Guns v. Butter • Efficiency v. equity • Leisure time v. work o The cost of something is what you give up to get it o Rational people think at the margin § Marginal cost vs. marginal benefits § Some decisions aren’t at the margin because of constraints o People respond to incentives § Punishment or rewards § Marginal changes in costs or benefits motivate people to respond o Trade can make everyone better off § People can specilise in what they are good at to benefit everyone o Markets are usually a good way to organise economic activity § Decisions are made by millions of self-interested households and firms § Proven to be very successful to promote overall economic wellbeing o Governments can sometimes improve market incomes § Improve equity and efficiency § Enforce policy’s o A country’s standard of living depends on its ability to produce goods and services § more productivity means better standard of living o Prices rise when the government prints too much money o Society faces a short-term trade-off between inflation and unemployment § Not all prices adjust straight away which means that unemployment rises
Definitions • Opportunity costs are the best alternative that must be given up to obtain some item • Scarcity – limited resources with unlimited wants – economic problem • Invisible Hand is the idea that buyers and sellers freely interacting in a market economy will create an outcome that allocates goods and services to those people who value them most highly and makes the best use of our scares resources. • Efficiency means that society gets the most that it can from its scarce resources (size of the pie) • Equity means the benefits of those resources are distributed fairly among the members of society (how the pie is divided) – reduces the incentive to work hard • Market economy is an economy that allocates resources through the decentralised decisions of many firms and households as they interact in markets for goods and services – firms decide who to hire and what to produce • Market failure is a situation in which a market left on its own fails to allocate resources efficiently • Externality is the uncompensated impact of ones person’s actions on the wellbeing of a bystander. A positive externality makes the bystander better off. A negative externality makes the bystander worse off • Market power is the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices • Inflation is an increase in the overall level of prices in the economy • Phillips Curve is the short-term trade-off between inflation and unemployment • Marginal change is a small incremental adjustment to a plan of action. • Marginal benefit is the benefit created by a marginal change. • Marginal cost is the cost created by a marginal change.
Chapter 2 - Thinking like an economist • • •
Think in terms of alternations Evaluate the cost of individual and social choices Examine and understand how certain events and issues are related.
Role of assumptions • Make assumptions in order to make the world easier to understand • The art in scientific thinking is deciding which assumption to make • Use it to answer different questions Economic models • Economists use models to simplify reality in order to improve our understanding of the world • Two basic economics models o The circular-flow diagram o The Production Possibilities Frontier § PPF § A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology. § Making more of one good without compromising output of another – pareto efficiency – economic growth when the graph increases § Shift in the PPF – economic growth – making more computers from the same resources but same amount of cars Chapter 3 – Independence and the gain from trade Trade • Trade the act of buying or selling a good or service in a market • When it’s a straight line PPF it is constant opportunity costs • E ven if there is an absolut e advanta ge to one country there is still benefits of trade • Absolute advantage is the ability of an individual, firm or country to produce more of a good or service than competitors using the same amount of resources
•
Comparative advantage is the ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers.
Microeconomics is the study of how households and firms make decisions and how they interact with others Macro economics is the study of economy-wide phenomena, including inflation, unemployment and economic growth Positive statements are claims that attempt to describe the world, as it is E.g. Minimum wage causes unemployment Normative statements are claims that attempt to prescribe how the would should be. E.g. The government should raise the minimum wage.
•
•
Economists study how individuals make decisions, how they interact with each other and the factors that affect the economy as a whole. 10 Lessons o People face trade-offs § Give up with one to get another – due to scarcity • Guns v. Butter • Efficiency v. equity • Leisure time v. work o The cost of something is what you give up to get it o Rational people think at the margin § Marginal cost vs. marginal benefits § Some decisions aren’t at the margin because of constraints o People respond to incentives § Punishment or rewards § Marginal changes in costs or benefits motivate people to respond o Trade can make everyone better off § People can specilise in what they are good at to benefit everyone o Markets are usually a good way to organise economic activity § Decisions are made by millions of self-interested households and firms § Proven to be very successful to promote overall economic wellbeing o Governments can sometimes improve market incomes § Improve equity and efficiency § Enforce policy’s o A country’s standard of living depends on its ability to produce goods and services § more productivity means better standard of living o Prices rise when the government prints too much money o Society faces a short-term trade-off between inflation and unemployment § Not all prices adjust straight away which means that unemployment rises
Definitions • Opportunity costs are the best alternative that must be given up to obtain some item • Scarcity – limited resources with unlimited wants – economic problem • Invisible Hand is the idea that buyers and sellers freely interacting in a market economy will create an outcome that allocates goods and services to those people who value them most highly and makes the best use of our scares resources. • Efficiency means that society gets the most that it can from its scarce resources (size of the pie) • Equity means the benefits of those resources are distributed fairly among the members of society (how the pie is divided) – reduces the incentive to work hard • Market economy is an economy that allocates resources through the decentralised decisions of many firms and households as they interact in markets for goods and services – firms decide who to hire and what to produce • Market failure is a situation in which a market left on its own fails to allocate resources efficiently • Externality is the uncompensated impact of ones person’s actions on the wellbeing of a bystander. A positive externality makes the bystander better off. A negative externality makes the bystander worse off • Market power is the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices • Inflation is an increase in the overall level of prices in the economy • Phillips Curve is the short-term trade-off between inflation and unemployment • Marginal change is a small incremental adjustment to a plan of action. • Marginal benefit is the benefit created by a marginal change. • Marginal cost is the cost created by a marginal change.
Chapter 2 - Thinking like an economist • • •
Think in terms of alternations Evaluate the cost of individual and social choices Examine and understand how certain events and issues are related.
Role of assumptions • Make assumptions in order to make the world easier to understand • The art in scientific thinking is deciding which assumption to make • Use it to answer different questions Economic models • Economists use models to simplify reality in order to improve our understanding of the world • Two basic economics models o The circular-flow diagram o The Production Possibilities Frontier § PPF § A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology. § Making more of one good without compromising output of another – pareto efficiency – economic growth when the graph increases § Shift in the PPF – economic growth – making more computers from the same resources but same amount of cars Chapter 3 – Independence and the gain from trade Trade • Trade the act of buying or selling a good or service in a market • When it’s a straight line PPF it is constant opportunity costs • E ven if there is an absolut e advanta ge to one country there is still benefits of trade • Absolute advantage is the ability of an individual, firm or country to produce more of a good or service than competitors using the same amount of resources
•
Comparative advantage is the ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers.
Microeconomics is the study of how households and firms make decisions and how they interact with others Macro economics is the study of economy-wide phenomena, including inflation, unemployment and economic growth Positive statements are claims that attempt to describe the world, as it is E.g. Minimum wage causes unemployment Normative statements are claims that attempt to prescribe how the would should be. E.g. The government should raise the minimum wage.
