Principles of Economics Ch.1 + Ch. 2

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What is demand determined by?
Human behaviour, biology, a desire for status etc.
What is wealth?
A store of value (value is defined as things people want). Wealth is an ability to get people to work for you.
How do you measure wealth?
With Gross Domestic Product (measure of thing in an economy that go through a market).
Why is Western Europe rich?
- Scientific mentality/education (Catholic/Orthodox/Protestant) - Human capital development - Creation of middle class - Consumer culture - Intellectual property - Women’s equality
Why is L. America/E. Europe/Africa/S. Asia Poor?
- Colonialism? – Exploitation? • Agriculture • Urbanization • Division of labour • Property laws (Romans invent v. strong ones) • Democratic institutions • Public/Private dichotomy • Accountability
The economic theories of John Maynard Keynes who advocated government monetary and fiscal programs intended to stimulate business activity and increase employment. Q: Should the government intervene in the economy to help out the poor and middle classes?
Neoliberalism is a policy model that encompasses both politics and economics. It favors private enterprise and seeks to transfer the control of economic factors from the government to the private sector. In favor of 'free trade'. Q: Should the government stay out, and let ‘the markets’ work their magic?
Structural Economics
It argued that developing world economies were at a structural disadvantage. It argued that governments needed to protect developing economies.
- It looks at the perspective of the individual, firm, industry, or market. It can be considered more specialized. - Assumes that individuals are attempting to maximize profit and utility (they are rational agents) - They are attempting to allocate scarce resources (inputs: labor, land, capital, managerial talent. In order to do so, they bring their goods to a market, and attempt to receive for this the means to live, and/or means to improve the material quality of their lives.
It looks at the general indicators of the health of the economy as a whole, thus, growth, employment, currency stability, health of the banking sector, credit markets, productive capacity, R&D, and the social and political effects of these things
Aspects of Microeconomics
• Supply and Demand – Production Theory – Demand theory • Elasticity • Opportunity Cost • Marginality/Marginal Revenue • Market Structure: Types of Market • Corporate Structure/Incentives • Theory of the Firm • Game Theory • Information economics • Labor Economics & Labor markets • Labor Laws/Policy • Corporate Legislation (can be macro) • Welfare Economics & Externalities
- The (abstract) place where supply meets demand. All transactions which involve money exchange are (part of) a market. - You can work off the grid (not measured in GDP), e.g. repairing a broken frame, or on the grid (involves money transactions).
Equilibirum (price)
Meeting point of the supply and demand curve.
Aspects of Macroeconomics
• Output/Income (GDP) • Unemployment/Employment • Wage Rates • Fiscal Policy • Trade Policy • Monetary Policy • Central Banks • Money Supply • Interest Rates • Inflation/Deflation • Banking Sector
a scarce object, in demand.
The Circular-Flow Diagram
- Represents the flow of money and goods and services in the economy. - Problems: 1. The government is not in the diagram. 2. Distinction between firm and household isn't always clear (e.g. family business). 3. Many of the sales are not to households.
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Production Possibility Frontier (PPF)
- In business analysis, the production possibility frontier (PPF) is a curve illustrating the varying amounts of two products that can be produced when both depend on the same finite resources. - It reveals all the trade-offs of changing the production possibilities. - A model for thinking about tradeoffs facing an economy - A visual model of scarcity & efficiency - Shows the maximum quantity of one good that can be produced for any given quantity of the other good. - Good way to illustrate the general economic concept of efficiency
Opportunity Costs
- every choice you make means forgoing some other alternative - constant slope -> constant opportunity costs - increasing opportunity cost -> bowed-out curve - typically rises because well-suited inputs are used up and less adaptable inputs are used instead
cost of the very next item is what matters in the market
Fiscal Policy
a government policy for dealing with the budget e.g. how does the government collect and redistribute taxes?
Monetary Policy
The regulation of money flows (central banks, interest rates etc.)
- Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. - a rough measure of a country's standard of living - Gross Domestic Product (per capita) - all supply and demand
Ceteris paribus (other things equal)
All other relevant factors remain unchanged
Individual choice
The decision by an individual of what to do, which necessarily involves a decision of what not to do. (All economic activities consist of this)
- Any simplified representation of reality that is used to better understand real life situations. - Models are important because their simplicity allows economists to focus on the effects of only one change at a time (if the rest is constant). - Most effective form: "thought experiments" -> simplified, hypothetical versions of real-life situations (but mathematics can be key).
Efficient in production
If the economy as a whole could not produce more of any good without producing less of something else - that is if it's on the ppf - then we say that the economy is efficient in production.
Efficiency in allocation
The economy has to allocate it's resources so that consumers are as well off as possible.
Efficient economy
- requires efficiency in production and allocation - must produce s much as they can + must produce the mix of goods people want to consume and deliver those goods to the right people
economic growth
an expansion of the economy's production possibilities
Sources of economic growth
- Increase in the economy's factor of production (resources used to produce goods and services). Factor of production: a resource that is not used up in production. Main factors of production: land, labor, physical and human capital. - Technology. Pushes out ppf frontier, makes it possible to produce more.
Comparative advantage
- The basis for mutual gain - If the opportunity cost of a production is lower for that country than for other countries (or service)
Absolute advantage
If the country can produce more of a good or service in output per worker than other countries
Trade when people directly exchange goods or services that they have for goods or services that they want
Organization that produces goods and services for sale
Capital market
Market in which capital is bought and sold
Positive economics
Branch of ecnomic anyalysis that describes the way the economy actually works (description).
Normative economics
Perscriptions about the way the economy should work (perscription).
Absolute value
Value of the negative number without the minus sign.
Reverse causality
When the true direction of causality between two variables is revesed.
4 principles of individual choice
- people make choices because recourses are scarce - the opportunity cost of an item is its true cost - "how much" is a decision at the margin - people respond to incentives, exploiting opportunities to make themselves better off
People make choices because recourse are scarce
- limited income + time - human resources + natural resources + air + water -> scarce - scarcity of resources means a society as a whole must make a choice - overall choice is the sum of individual choices (society with a market economy).
The opportunity cost of an item is its true cost
- all costs are opportunity costs -> alternatives - seperate thing from monetary costs though that can be a good indication - tuition and housing example
"How much" is a decision at the margin
- are made at the margin - trade-off: a comparison of costs and benefits when doing something - marginal choices: decisions about whether to do a bit more or a bit less of an activity -> marginal analysis
People respond to incentives, exploiting opportunities to make themselves better off
- people respond to incentives (anything that offers reward for change of behavior) to make themselves better off - economists tend to be skeptical of any attempt to change behavior that doesn't change incentives
principles of interaction of individual choices
- there are gains from trade - markets should move towards an equilibrium - resources should be used efficiently to achieve society's goals - markets usually lead to efficiency, but when they don't, government intervention can improve society's welfare
There are gains from trade
- in a market economy individuals engage in trade - there are gains from trade -> people can get more of what they want through trade - specialization
Markets should move towards an equilibrium
- equilibrium -> when no individual would be better off doing sth different - because people respond to incentives, markets move toward equilibrium - markets usually reach equilibrium through changes in prices - any time there is change, the situation will move to an equilibrium
Resources should be used efficiently to achieve society's goals
- "an economy's resources are used efficiently when used in a way that has fully exploited all opportunities to make everyone better off" (without making others worse off) - maximum gains from trade possible with the available resources - trade-off between equity and efficiency
Markets usually lead to efficiency, but when they don't, government intervention can improve society's welfare
- invisible hand -> how a market economy harnesses the power of self-interest for the good of society. - because people exploit gains from trade, markets usually lead to efficiency - market failure -> inefficiency (govern. can intervene to improve society's welfare) - ride-hailing services -> equilibrium
Principles of economic - wide interactions
- one person's spending is another's income - overall spending sometimes gets out of line with the economy's productive capacity: when it does, government policy can change spending - increases in the economy's potential lead to economic growth over time
One person's spending is another's income
- chain reaction of changes in spending behavior
Overall spending sometimes gets out of line with the economy's productive capacity: wehn it does, government policy can change spending
- government policies can be used to address imbalances (e.g shortfalls,, excesses etc.) - overall spending sometimes gets out of line with the economy's productive capacity: when it does, govern policy can change spending - government spending, taxed ans control of money are the tools of a macroeconomic policy
Increases in the economy's potential lead to economic growth over time
- economy's potential -> the total amount of goods and services it can produce - economic growth inevitably leads to fundamental economic and social change
market failure
Market failure, in economics, is a situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group.
command economy
an economy in which there is a central authority making decisions about production and consumption
invisible hand
used to refer to the way a market economy manages to harness the power of self-interest for the good of society
a situation in which individuals cannot make themselves better off by doing something different. An economic situation is in equilibrium when no individual would be better off doing something different.
Equity means that everyone gets his or her fair share. Since people can disagree about what’s fair, equity isn’t as well defined as a concept as efficiency. - Policies that promote equity often come at a cost of decreased efficiency in the economy