economics

How will the goods and services be produced?

"Using the least-cost production techniques." Firms choose how to produce the goods and services they sell, often facing a trade-off between using more workers or using more machines. In combinations and ways that minimize the cost per unit of output

The economic problem that every society must solve

1. A limited amount of resources can produce a limited amount of goods and services. 2. The cost of producing more of one good is the value of what must be given up to produce it. What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? In a world of scarcity, we have limited economic resources to satisfy our desires ~therefore we face trade-offs Trade-off: the idea that, because of scarcity, producing more of one good or service means producing less of another good or services.

building an economic model

1. Decide on the assumptions to use in developing the model 2. Formulate a testable hypothesis 3. Use economic data to test the hypothesis 4. Revise the model if it fails to explain the economic data well 5. Retain the revised model to help answer similar economic questions in the future

In analyzing markets, we generally assume:

1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin

How will the Goods and services be produced?

A firm might have several different methods for producing its goods and services. Example #1 A music producer can make a song sound good by ~Hiring a great singer and using standard production techniques ~ Hiring a mediocre singer and using Auto-Tune to correct the inaccuracies. Example #2: As the cost of Manufacturing labor changes, a firm might respond by ~changing its production technique to one that employs more machines and few workers ~moving its factory to a location with cheap labor

Normative Analysis of Law

An approach that seeks to evaluate whether laws are good or bad, and which may recommend changes ("policy") to improve the legal system

People responds to Economic incentives

As incentives change, so do the actions that people will take Example: Changes in several factors have resulted in increased obesity in Americans over the last couple of decades, including ~Decreases in the price of fast food relative to healthful food relative to healthful food ~improved non-active entertainment options ~increased availability of health care and insurance, protecting people against the consequences of their actions.

People are rational

Consumers and firms use all available information before as they act to achieve their goals; they weigh the benefits and the costs. Economists assume that consumers and firms use all available information as they act to achieve their goals Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.

market economy

Economic decisions are made by individuals or the open market. an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

Would more people become primary care physicians if medical school were free? and if so, would it be worth the cost?

Economic models can find answers to the positive aspects of this debates

Market Economies and Equity

Economically efficient outcomes are not necessarily desirable ~less efficient outcomes may be more fair or equitable

Positive and Normative Analysis

Economist try to mimic natural scientists by using the scientific method. but economics is a social science; studying the behavior of people is often tricky

Describe the roles of models in economic analysis

Economists develop economic models to analyze real-world issues.

People are Rational

Example: Apple doesn't randomly choose the price of its smartwatches; it chooses the price(s) that it thinks will be most profitable

School Be Free?

Forecasts indicate a significant shortage of doctors, especially primary care physicians, by 2020. High costs of medical school may: ~prevent some people from becoming doctors ~lead people to pursue lucrative specialties instead of primary care

Scarcity of resources

In economics, this concept refers to limitations—insufficient resources, goods, or abilities to achieve the desired wants/needs of humans. (Think: those without access to clean water experience an insufficiency of water). Forces people to prioritize wants, and to be selective in buying goods and services only a limited amount of resources available to produce the unlimited amount of goods and services we desire. You must make a choice.

What goods and sercices will be produced?

Individuals, firms and governments must decide on the goods and services that should be produced. An increase in the production of one good requires the reduction in the production of some other good. this is a trade-off, resulting from the scaricity of productive resources. the highest-valued alternative given up in order to engage in some activity is known as the opportunity cost, Example: the opportunity cost of increased funding for space exploration might be giving up the opportunity to fund cancer research.

Efficiency of Economies

Market economies tend to be more efficient than centrally planned economies Market economies promote: Productive efficiency, where goods or services are produced at the lowest possible cost; and Allocate efficiency, where 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.

caveats about market economies

Markets may not result in fully efficient outcomes. Example: ~People might not immediately do things in the most efficient way ~Government might interfere with market outcomes ~Market outcomes might ignore the desires of people who are not involved in transactions-EX: POLLUTION Economically efficient outcomes may not be the most desirable. Markets result in high inequality; some prefer more equity, I.e. fairer distribution of economic benefits.

Optimal Decisions are made at the margin

Most decisions in life involve doing a little more or a little less. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost—in symbols, where MB = MC. Marginal utility is more useful than total utility in consumer decision making because While some decisions are all-or-nothing, most decisions involve doing a little more or a little less of something

What is this class about?

People making choices as they try to attain their goals. choices and necessary because we live in a world of scarcity.

People are more productive in more developed countries because they

People respond to economic incentives People act from a variety of motives, including envy, compassion, and religious belief,

How will the goods and services be made in the market system?

Producing more of one good or service means producing less of another good or service. the best measure of the cost of producing a good or service is the value of what has to be giving up to produce it, Trade-offs: and Opportunity cost......

Source of Economic Efficency

Productive efficiency comes about because of competition. Allocative efficiency arises due to voluntary exchange. Voluntary Exchange: A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction. ~each transaction that takes place improves the well-being of the buyer and seller" transactions continue until no further improvement can take place.

Why is a 10-mile-per-hour speed limit unlikely to be optimal?

The faster a car or truck is traveling, the more likely it is that an accident will cause damage to the vehicles involved and injuries to the vehicles and occupants. Increasing the speed limit has benefits as well the higher the speed limit, the faster people and freight will reach their destinations The optimal speed limit will be the one where the marginal cost of decreased safety equals the marginal benefit of faster travel A 10-mile-per-hour speed limit would result in very long travel times. this speed limit isn't optimal because the marginal benefit from increasing it is likely to be much greater than the marginal cost.

How could a state highway department use marginal analysis to decide whether to increase the speed limit on a highway from 55 to 65 miles per hour?

The state highway department should try to estimate the dollar values of the marginal cost and marginal benefit of making the change. if the marginal benefit is greater than the marginal cost, the speed limit should be increased

Who will receive the goods and service produced?

The way we are most familiar with in the united states is that people with higher incomes obtain more goods and services changes in tax and welfare policies change the distribution of income: though people often disagree about the extent to which this is "redistribution" is desirable.

Three key economic questions

What to produce, how to produce it, and for who to produce it? 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

What goods and services will be produced?

Which of the following is one of the Five Fundamental Questions? Individuals, firms, and governments must decide on the goods and services that should be produced. "Goods and services that are profitable." What will be produced is determined by the choices that consumers and people working for firms or the government make Consumers, managers of firms, and government policymakers face the problem of scarcity by trading off one good or service for another choice made comes with an opportunity cost, measured by the value of the best alternative giving up.

Optimal Decisions are made at the margin

While some decisions are all-or-nothing, most decisions involve doing a little more or a little less of something Example: Should you watch an extra hour of TV, or study instead? Economists think about decisions like this in terms of the marginal cost and benefits (MC and MB): the additional cost or benefit associated with a small amount extra of some action. comparing MC and MB is known as marginal analysis.

optimal decisions are made at the margin

While some decisions are all-or-nothing, most decisions involve doing a little more or a little less of something Marginal utility is more useful than total utility in consumer decision making because Most decisions in life involve doing a little more or a little less. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost—in symbols, where MB = MC.

Equity

a condition in which people receive from a relationship in proportion to what they give to it The fair distribution of economic benefits An important trade-off for a government is that between efficiency and equity Example: if we tax income, people might work less or open fewer businesses, but those tax receipts can fund programs that aid the poor

Economist

a person who studies the economy person who studies the production, distribution, and consumption of goods and services Study these choices using economic models, simplified versions of reality used to analyze real-world economic situations.

Trade offs

alternative choices made by consumers in the marketplace alternative choices Alternatives that must be given up when one is chosen rather than another

centrally planned economy

an economic system in which the government makes all decisions on the three key economic questions economic system in which the central government makes all decisions on the production and consumption of goods and services an economy in which the government decides how economic resources will be allocated

important features of economic models

assumptions,simplifications, test-ability, and economic variables Assumption and simplifications: every model needs them in order to be useful. Test ability: good models generate testable predictions, which can be verified or disproves using data. Economic Variables: something measurable that can have different values, such as the incomes of doctors

Economic models are

built with assumptions often useful in forming economic policy Simplified versions of reality designed to analyze "what is" to explain human decision making in any context.

opportunity cost of capital

expected rate of return given up by investing in a project The minimum acceptable rate of return on capital investment is set by the investment opportunities available to shareholders in financial markets the rate used in discounting future cash flow; also called the capitalization rate or discount rate

economic model of social responsibility

holds that society will benefit most when business is left alone to produce and market profitable products that society needs society will benefit most when business is left alone to produce and market profitable products that society needs the view that society will benefit most when business is left alone to produce and market profitable products that society needs

Obesity is rising in America, for various reasons.

is one of those reasons health insurance? People with health insurance have less incentive to stay healthy than people without health insurance Holding constant other factors like age, gender, and income,research shows people with health insurance are more likely to be obese. They are responding to economic incentives.

Economist

mostly perform positive analysis

Scarcity Principle

opportunities seem more valuable to us when they are less available Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another. asserts that opportunities seem more valuable when their availability is limited

Explain these three key economic ideas:

people are rational people responds to economic incentives; optimal decisions are made at the margin we interact with one another in markets

Three Key Economic Ideas

people are rational, people respond to incentives, optimal decisions are made at the margin people are rational, people respond to economic incentives, optimal decisions are made at the margin 1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin

Economists

people who study economics Scholars of the production, distribution, and consumption of goods within an economy Study how societies use available resources

When analyzing human behavior, we can perform;

positive analysis and normative analysis

Positive Analysis vs. Normative Analysis

positive analysis: what actual behaviour and policies are normative analysis: describe what should or ought to be done - individual interests can outweigh normative justifications PA- about facts NA- a matter of values and opinions

economic model

simplified version of a complex concept or behavior expressed in the form of a graph, figure, equation, or diagram a theory or simplified representation that helps explain and predict economic behavior in the real world a simplified version of reality used to analyze real-world economic situations

voluntary exchange

the act of buyers and sellers freely and willingly engaging in market transactions a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction the concept that people may decide what and when they want to buy and sell

Economics

the branch of knowledge concerned with the production, consumption, and transfer of wealth. the branch of knowledge concerned with the production, consumption, and transfer of wealth. The study of how people seek to satisfy their needs and wants by making choices

Scarcity

the limited nature of society's resources Limited quantities of resources to meet unlimited wants A situation in which unlimited wants exceed the limited resources available to fulfill those wants

opportunity cost

the most desirable alternative given up as the result of a decision whatever must be given up to obtain some item Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

allocative efficiency

the particular mix of goods and services most highly valued by society when the mix of goods being produced represents the mix that society most 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

economics of scale

the reduction in the cost of a good brought about especially by increased production at a given facility a proportionate saving in costs gained by an increased level of production. factors that cause a producer's average cost per unit to fall as output rises

marginal analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less the study of marginal decisions analysis that involves comparing marginal benefits and marginal costs

Microeconomics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. the study of how households and firms make decisions and how they interact in markets ~how households and firms make choices. ~how they interact in markets, and ~How the govenment attempts to influence their choices

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth the study of economy-wide phenomena, including inflation, unemployment, and economic growth The study of the economy as a whole is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Types of economies

traditional, command, market, mixed Centrally planned economy: an economy in which that government decides how economic resources will be allocated economic Market economy: An economy in which the decisions of households and firms interaction in markets allocate economic resources Mixed Economy: an economy in which most economic decisions result from the interactions of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

positive analysis

what concerned with what is analysis concerned with what is

normative analysis

what ought to be concerned with what ought to be analysis concerned with what ought to be

Normative analysis is concerned with

what should be what ought to be

Examples of Microeconomics issues

~How consumers react to changes in products prices ~How firms decide what prices to charge for the products they sell ~which government policy would most efficiently reduce teenage smoking ~What are the cost and benefits of approving the sale of a new prescription drug ~What is the most efficient way to reduce air pollution

Examples of Macroeconomic issues

~Why economies experience periods of recession and increasing unemployment ~Why, over the long run, some economies have grown much faster than others ~What determines the inflation rate ~What determines the value of the U.S. dollar ~whether government intervention can reduce the severity of recessions.