Economics Chapters 1-3

Which goods will a nation typically import?

those goods in which other nations have a comparative advantage

trade

when each person specializes in producing a good for which he/she has a comparative advantage, total production in the economy rises

Microeconomics

Microeconomics is the study of how households and firms make decisions and how they interact in specific markets.

3. Ten Pricniples of Economics-Rational People Think at the Margin

A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.

Normative statements

A second type of statement, such as Noah's, is normative. Normative statements are prescriptive. They make a claim about how the world ought to be.

8.Ten Pricniples of Economics-A Country's Standard of Living Depends on Its Ability to Produce Goods and Services

Almost all variation in living standards is attributable to differences in countries' productivity—that is, the amount of goods and services produced by each unit of labor input. In nations where workers can produce a large quantity of goods and services per hour, most people enjoy a high standard of living; in nations where workers are less productive, most people endure a more meager existence. Similarly, the growth rate of a nation's productivity determines the growth rate of its average income.

4. Ten Pricniples of Economics-People Respond to Incentives

An incentive is something (such as the prospect of a punishment or reward) that induces a person to act. Because rational people make decisions by comparing costs and benefits, they respond to incentives.the influence of prices on the behavior of consumers and producers is crucial to how a market economy allocates scarce resources. When policymakers fail to consider how their policies affect incentives, they often end up facing unintended consequences. When analyzing any policy, we must consider not only the direct effects but also the less obvious indirect effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior.

Graphs Models are all based on assumptions

Assumptions can simplify the complex world and make it easier to understand. Once we understand international trade in this simplified imaginary world, we are in a better position to understand international trade in the more complex world in which we live.

2. Ten Pricniples of Economics-The Cost of Something Is What You Give Up to Get It

Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action

Absolute Advantage

Economists use the term absolute advantage when comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good ex:Ruby has an absolute advantage in producing both meat and potatoes because she requires less time than Frank to produce a unit of either good. Ruby needs to input only 20 minutes to produce an ounce of meat, whereas Frank needs 60 minutes. Similarly, Ruby needs only 10 minutes to produce an ounce of potatoes, whereas Frank needs 15 minutes. Thus, if we measure cost in terms of the quantity of inputs, Ruby has the lower cost of producing potatoes.

Market Power and Market Failure

Economists use the term market failure to refer to a situation in which the market on its own fails to produce an efficient allocation of resources. Another possible cause of market failure is market power, which refers to the ability of a single person or firm (or a small group) to unduly influence market prices. In the presence of externalities or market power, well-designed public policy can enhance economic efficiency.

Efficiency

Efficiency means that society is getting the maximum benefits from its scarce resources. In other words, efficiency refers to the size of the economic pie.

Equality

Equality means that those benefits are distributed uniformly among society's members. Equality refers to how the pie is divided into individual slices.

Equality and Invisible Hand

Even when the invisible hand yields efficient outcomes, it can nonetheless leave sizable disparities in economic well-being. A market economy rewards people according to their ability to produce things that other people are willing to pay for The invisible hand does not ensure that everyone has sufficient food, decent clothing, and adequate healthcare. This inequality may, depending on one's political philosophy, call for government intervention. To say that the government can improve on market outcomes does not mean that it always will.

Notes

Factors or production: Land Capital Labor. Technology and Entrepreneurship got added later but some think they should be added Services=intangibles Goods= tangeables We are a Service led economy Meaning-we consume more from abroad than export When tax there is less money in the economy PPF- Main purpose is to show growth and production The more you make one item and less of another the less efficient you are Full utilization anywhere along the curve but the closer you get to the ends the less efficient your resources is going to be The US is a net importer of goods =tangible stuff We bring in more goods than we sell out However we are net exporter of services= export more services than we bring in Riacardo founded the theory of comparative advantage and argued against restrictions on trade Markets are a good way to organize because you don't have to organize it runs itself

Price of trade

For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. Each party can buy a good at a price that is lower than his or her opportunity cost. In the end, each person specializes in the good for which he or she has a comparative advantage and, as a result, is better off.

6. Ten Pricniples of Economics-Markets Are Usually a Good Way to Organize Economic Activity

In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self-interest guide their decisions. In a market economy, no one is looking out for the economic well-being of society as a whole. Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being. Market economies have proven remarkably successful in organizing economic activity to promote overall economic well-being. *Note-Communist countries operated on the premise that government officials were in the best position to allocate the economy's scarce resources. These central planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted economic well-being for the country as a whole.*

David Ricardo

In his 1817 book Principles of Political Economy and Taxation, Ricardo developed the principle of comparative advantage as we know it today.

In the markets for goods and services in the circular-flow diagram

In the markets for goods and services, households are buyers, and firms are sellers. In particular, households buy the output of goods and services that firms produce.

In the markets of factors of production in the circular-flow diagram

In the markets for the factors of production, households are sellers, and firms are buyers. In these markets, households provide the inputs that firms use to produce goods and services. The circular-flow diagram offers a simple way of organizing the economic transactions that occur between households and firms in the economy.

Possibility Frontier chapter 3- useful for?

In this case, the production possibilities frontier is also the consumption possibilities frontier. These production possibilities frontiers are useful in showing the trade-offs that Frank and Ruby face, but they do not tell us what Frank and Ruby will actually choose to do.

circular flow diagram

In this model, the economy is simplified to include only two types of decision makers—firms and households. Firms produce goods and services using inputs, such as labor, land, and capital (buildings and machines). These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce.

Adam Smith

Individuals are usually best left to their own devices, without the heavy hand of government guiding their actions. This political philosophy provides the intellectual basis for the market economy and for free society more generally. In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith made the most famous observation in all of economics: Households and firms interacting in markets act as if they are guided by an "invisible hand" that leads them to desirable market outcomes. Smith's great insight was that prices adjust to guide these individual buyers and sellers to reach outcomes that, in many cases, maximize the well-being of society as a whole. When a government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand's ability to coordinate the decisions of the households and firms that make up an economy Smith is saying that participants in the economy are motivated by self-interest and that the "invisible hand" of the marketplace guides this self-interest into promoting general economic well-being.

Why is interdepenadnce and trade desirable?

Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

Macroeconomics

Macroeconomics is the study of economy-wide phenomena.

7. Ten Pricniples of Economics-Governments Can Sometimes Improve Market Outcomes

One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources. We all rely on government-provided police and courts to enforce our rights over the things we produce—and the invisible hand counts on our ability to enforce those rights. There are two broad rationales for a government to intervene in the economy and change the allocation of resources that people would choose on their own: to promote efficiency or to promote equality.

Positive Statments

Positive statements are descriptive. They make a claim about how the world is.

Compartive Advntage and trade

The gains from specialization and trade are based not on absolute advantage but on comparative advantage. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises

Opportunity cost

The opportunity cost of an item is what you give up to get that item.

production possibilities frontier-PPF

The production possibilities frontier is a graph that shows the various combinations of output—in this case, cars and computers—that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output. The production possibilities frontier shows one trade-off that society faces. Once we have reached an efficient point on the frontier, the only way of producing more of one good is to produce less of the other. The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other good. The opportunity cost of a car in terms of the number of computers is not constant in this economy but depends on how many cars and computers the economy is producing. This is reflected in the shape of the production possibilities frontier

Shift PPF

The production possibilities frontier shows the trade-off between the outputs of different goods at a given time, but the trade-off can change over time.

1. Ten Principles of Economics-People Face Trade-Offs

To get something that we like, we usually have to give up something else that we also like. Making decisions requires trading off one goal against another.

5. Ten Pricniples of Economics-Trade Can Make Everyone Better Off

Trade allows each person to specialize in the activities she does best, whether it is farming, sewing, or home building. By trading with others, people can buy a greater variety of goods and services at lower cost.

How Trade Expands the Set of Consumption Opportunities

Trade allows each to consume more meat and more potatoes.

Why trade benefits everyone?

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

9. Ten Pricniples of Economics-Prices Rise When the Government Prints Too Much Money

What causes inflation? In almost all cases of large or persistent inflation, the culprit is growth in the quantity of money. When a government creates large quantities of the nation's money, the value of the money falls.

production possibilities frontier chapter 2 vs 3

You may recall that the production possibilities frontier in Chapter 2 was drawn bowed out. In that case, the rate at which society could trade one good for the other depended on the amounts that were being produced. Here, however, Frank's technology for producing meat and potatoes (as summarized in Figure 1) allows him to switch between the two goods at a constant rate. . As a result, the production possibilities frontier is a straight line.

comparative advantage

comparative advantage when describing the opportunity costs faced by two producers. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it. The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.

Economics is

how society manages its scarce resources.

10. Ten Pricniples of Economics-Society Faces a Short-Run Trade-Off between Inflation and Unemployment

over a period of a year or two, many economic policies push inflation and unemployment in opposite directions. Policymakers can exploit the short-run trade-off between inflation and unemployment using various policy instruments. By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the overall demand for goods and services. Changes in demand in turn influence the combination of inflation and unemployment that the economy experiences in the short run. Because these instruments of economic policy are potentially so powerful, how policymakers should use them to control the economy, if at all, is a subject of continuing debate.

Why is it impossible for one person to have a compartive advantage in both goods?

t is impossible for one person to have a comparative advantage in both goods. Because the opportunity cost of one good is the inverse of the opportunity cost of the other, if a person's opportunity cost of one good is relatively high, the opportunity cost of the other good must be relatively low.

Scarcity

the limited nature of society's resources