Economics Ch 1

Marginal Analysis

analysis that involves comparing marginal benefits and marginal costs

Formula for percentage of change

(Value in first divided by Value in second) divided by value in the first period

Steps in developing a new model

1. Decide on assumptions to use. 2. Formulate Hypothesis. 3. Use data to test. 4. Revise Model if needed. 5. Retain model to answer questions.

Trade-offs 3 fundamental questions

1. What to produce? 2. How to produce it? 3. Who will receive it?

Allocative Efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Mixed Economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources

Centrally Planned Economy

An economy in which the government decides how economic resources will be allocated

People are Rational

Assume consumers and firms use all available information as they act to achieve their goals. They weigh the benefits and costs of each action only if the benefits outweigh the costs

Market Economy Properties

Government Intervenes to some extent. Ex) Social Security, Minimum Wage. Government plays a role in the allocation on resources.

Three ideas of Economics

People are rational, people respond to economic incentives, optimal decisions are made at the margin.

Two types of Efficiency

Productive and Allocative

Optimal Decisions are made at the margin

Reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost MB=MC

Market Economy Properties

Rely primarily on privately owned firms to produce goods and services and to decide how to produce them. It determines who receives the goods and services produced. Firms must produce goods and services that meet the wants of consumers, or the firms will go out of business. The income of an individual is determined by the payments he receives for what he sells. Rewards hard work.

Most Importan Centrally Planned Economy in 1991

Soviet Union

When Allocative Efficiency is achieved

When the combination of competition among firms and voluntary exchange between firms and consumers results in firms producing the mix of goods and services that consumers prefer most.

Reasons why Markets are efficient

They promote competition and facilitate voluntary exchange

When Productive Efficiency is achieved

When competition among firms in markets forces the firms to produce goods and services at the lowest cost

Normative Analysis

analysis concerned with what ought to be

Market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Voluntary Exchange

a situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction

Market Economy

an economy in which the decisions of households and firms interacting in markets allocate economic resources

Positive Analysis

analysis concerned with what is

Innovation

development of a new good or a new process for making a good

Microeconomics examples

explaining how consumers react to changes in product prices and how firms decide what prices to charge for the products they sell

Macroeconomics examples

explaining why economies experience periods of recession and increasing unemployment and why some economies have grown much faster than others

Economic Profit

including the opportunity cost of all resources used by the firm

Reasons for models

make economic ideas sufficiently explicit and concrete so that the individuals, firms, or the government can use them to make decisions; answer questions; analyze and issue.

Technology

process it uses to produce good and service; depends on skill of manager, training of workers, and speed of machinery

Human Capital

refers to the accumulated training and skills that workers possess

Economic Models

simplified versions of reality used to analyze real-world economic situations.

Entrepreneur

someone who operates a business; decide what goods and services to produce and how to produce them

Economic Variable

something measurable that can have different values, such as the wages of software programmers

economics

study of the choices consumers, business managers, and government officials make up to attain their goals, given their scarce resources

Equity

the fair distribution of economic benefits. EX) taxes on different wages

Opportunity Cost

the highest-valued alternative that must be given up to engage in an activity

Trade-off

the idea that because of scarcity, producing more of one good or service means producing less of another good or service

Productive Efficiency

the situation in which a good or service is produced at the lowest possible cost

Microeconomics

the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

Scarcity

unlimited wants exceed the limited resources available to fulfill those wants

Factors of production

workers, capital, natural resources, and entrepreneurial ability