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LU 1: Introduction to Economics (10 Principles of Economics (People face…
LU 1: Introduction to Economics
10 Principles of Economics
Trade can make everyone better off
example:
People gain from their ability to trade with one another.
Markets are usually a good way to organize economics activity
example:
Market economy is an allocates resourses through decentralized decisions of many firms and household.
People respond to incentives
example:
Rational people think at the margin
example:
People make decisions by comparing costs and benefits at the margin.
A country's standard of living depends on its ablity to produce goods and service
:explode:Compare by: total market value of a nation's production.
:explode:Compare by: personal income
The cost of something is what yoou give up to get it
example:
Prices rise when the government prints too much money.
People face trade-offs
example:
:check:Efficiency
:check:Equity
Society faces a short-run trade-off between inflation and unemployment
example:
Governments can sometimes improve market outcomes.
:black_flag:Market work only if property rights are enforced.
:black_flag:Market failure occurs when the market fails to allocate resourses efficiently.
A. How People Make Decisions
B. How People Interact
C. How the Economy As A Whole Works
2 Economic Models
Circular flow
is a visual model of the economy that shows how dollars flow through markets among households and firms.
Production possibilities frontier
is a graph shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
one who manages a household
Interdependence and the Gains from Trade
:!?: Why determines the pattern of production and trade?
:!?:What should each person produce?
2 Advantage
Comparative advantage
:red_flag: Who should produce what?
:red_flag:How much should be traded for each product?
Absolute advantage
producer requires a smaller quantity of inputs
Normative Analysis
Positive statements
called descriptive analysis
Normative statements
called prescriptive analysis
