Chapter 1

Limitations of the Invisible Hand (Intervention case for government)

1) Income distribution (changing the distribution) 2) Role of Government: -Public Goods: Non-rivalry in consumption, non exclusion (hard to exclude), Ex) Mount Rushmore and National Security -Externalities: Private Costs/Benefits do not equal social costs/Benefits (Neither buyer nor seller), monopoly (one set of many buyers ex) only producer of life-saving drug), and macroeconomic instability.

Crucial Ingredients for Exchange for Buying and Selling to go Smoothly

1) Well-define property rights (Ex: Deed to house/car, can't put property right on clean air and that's why we have pollution) 2) Low Transactions Costs (And price of product) (Ex: Taxes, Handling/Shipping Fee, Exchange Takes place less frequently if high) 3) Information/Uncertainty (Price/Quality Unsureness) (Ex: Judge before I buy (chairs, shoes, etc), Judge only after purchase (Restaurant food), and Judge even after purchase, can't tell (Dentist).

Recession

A downturn in the economy.

Free Goods (Resource) *

A free good is a good that is not scarce, and therefore is available without limits. A free good is available in as great a quantity as desired with zero opportunity cost to society. This is not air tight, however, it can always become scarce.

Use the concept of opportunity cost to explain: Convenience stores, which have higher prices than supermarkets, cater to busy people.

Busy people are always on the go and the opportunity cost of going to a convenience store reaps higher return than if they were to go to a supermarket. Convenience stores are called convenience stores for a reason and they cater to busy on the go people for they save them time which is an expense they don't have. On the other hand, supermarkets are geared more towards people who set aside time to go grocery shopping and buy large amounts of food.

Economy

A system for coordinating society's productive activities. Study of how scarce resources are allocated among competing ends/uses.

Exchange *

An act of giving one thing and receiving another (especially of the same type or value) in return. Selling and buying.

Equilibrium

An economic situation when no individual would be better off doing something different. Markets normally move toward this because individuals usually respond to incentives.

Market Economy *

An economy in which decisions about production and consumption are made by individual producers and consumers.

Resource

Anything that can be used to produce something else.

Incentive

Anything that offers rewards to people who change their behavior, exploiting opportunities to make them better off.

Law of Diminishing Returns *

As you increase one input in equal increments, holding all other inputs the same, the additions to output will eventually diminish.

Law of Increasing Costs *

As you produce more of a good (or service) its opportunity cost per unit goes up (more severe sacrifice).

Marginal Decisions

Decisions about whether to do a bit more or a bit less of an activity.

Why is a PPF Bowed outward?

Due to the law of increasing costs.

Rational Economic Agents

Make decisions at the margin: undertake those activities whose marginal benefits exceeds marginal costs.

Equity

Means that everyone gets his or her fair share. Since people can disagree about what's "fair," equity isn't as well defined a concept as efficiency (Both used to evaluate the economy as there's often a trade-off between the two).

Use the concept of opportunity cost to explain: more people choose to get graduate degrees when the job market is poor.

More students choose to get graduate degrees when the job market is poor because getting a graduate degree is a better investment and the opportunity cost of not getting a graduate degree may result in that individual being jobless. By getting a graduate degree the person would be more likely to get a job in a competitive job market than someone who has a bachelor's degree. Although the opportunity cost of going to graduate school includes things such as tuition, housing, books, etc. and may seem very expensive, the people who choose to get a graduate degree believe that it will pay off when they get that job.

Interaction of Choices

My choices affect your choices, and vice versa-is a feature of most economic situations. The results of this interaction are often quite different from what the individuals intend.

What shape slope does a PPF have and why? *

Negative, due to positive opportunity cost of producing a good or service.

Gains from Trade

People can get more of what they want through trade than they could if they tried to be self-sufficient.

How can changes in spending behavior spread throughout the economy?

People in a market economy earn income by selling things, including their own labor, one person's spending is another person's income.

Invisible Hand *

Refers to the way in which the individual pursuit of self-interest can lead to good results for society as a whole. When economic agents (Buyers and Sellers) act in their self interest, without any interference by the government, they end up promoting well being of the society. It emphasizes "hands-off" government and has less relevance in modern world as all governments interfere to varying degrees in their economies.

What are the four links in economy?

Scarcity to Choice to Specialization to Exchange.

Individual Choice *

The decision by an individual of what to do, which necessarily involves a decision of what not to do. This is the basis of economics because individuals are limited in their choices by money and time; economies are limited by their supplies of human and natural resources.

Impact of an advancement in technology on equilibrium price and quantity in market for lawn mowers

Supply shifts to right (Greater quantity and lower price) and doesn't impact demand curve.

Macroeconomics *

The branch of economics that is concerned with overall ups and downs in the economy.

Microeconomics *

The branch of economics that studies how people make decisions and how these decisions interact.

Specialization *

The cause of the increase in output from trade. Each person specializes in the task that he or she is good at performing. This is the source of gains from trade.

Economic Growth

The growing ability of the economy to produce goods and services.

Use the concept of opportunity cost to explain: Fewer Students enroll in classes that meet before 10:00am.

The opportunity cost of enrolling in a class that meets before 10:00 AM is loss of sleep one may have by walking up before 10:00 AM. These students would rather sleep in than take a class which is an opportunity cost that they deem more beneficial.

Use the concept of opportunity cost to explain: There are more parks in suburban than in urban areas.

The opportunity cost of having a park increases in an urban area rather than a suburban area because the space the park takes up could be used for businesses, housing, shops, and other urban features while in the suburban areas space is not as much of an issue and can be used more freely.

Opportunity Cost *

The real cost of an item; what you must give up in order to get it. Scarce goods have positive opportunity costs and free goods have zero opportunity costs. Attending class?

Economics *

The social science that studies the production, distribution, and consumption of goods and services. All economic analysis is based on a set of basic principles that apply to three levels of economic activity. First, we study how individuals makes choices; second, we study how these choices interact; and third, we study how the economy functions overall.

Marginal Analysis *

The study of marginal decisions.

Spending in the economy can get out of line with the economy's productive capacity. So, what happens when there's spending below the economy's productive capacity?

This leads to a recession.

Spending in the economy can get out of line with the economy's productive capacity. So, what happens when there's spending above the economy's productive capacity?

This leads to inflation.

Trade

What individuals engage in, in a market economy. They provide goods and services to others and receive goods and services in return.

What is the economic problem? *

What to produce (Necessities vs Luxuries)? How to produce (Intensive labor vs Capital Intensive labor)? For Whom to produce?

Efficient Economy

When it takes all opportunities to make some people better off without making other people worse off. Resources should be used as efficiently as possible to achieve society's goals. Usually markets lead to efficiency but when markets fail, government intervention can improve society's welfare and steer the economy between recession and inflation.

Scarce *

When not enough of the resources are available to satisfy all the various ways a society wants to use them. When demand exceeds supply.

Market Failure

When the individual pursuit of self-interest leads to bad results for society as a whole.

Trade-Off (At the Margin)

When you compare the costs with the benefits of doing something (A bit more or a bit less). Many economic decisions involve questions not of "whether" but of "how much" - how much to spend on some good, how much to produce, etc.

Use the concept of opportunity cost to explain: More people choose to do their own home repairs when the economy is slow and hourly wages are down.

While the opportunity cost of doing your own repairs include time and money spent on supplies, the opportunity cost of paying someone to do repairs includes money and time. More people choose to do their own home repairs when the economy is slow and hourly wages are down because the opportunity cost is worth it to them. The people who choose to do their own repairs may feel that the workers may take their time when doing the repair because hourly wages are down which is an expense that they do not want to have to pay.