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LU 1 Introduction (How people make decisions (People face trade-offs (give…
LU 1 Introduction
How people make decisions
People face trade-offs
give up something to obtain one thing.
eg. Sleep or Attend Lecture
Opportunity cost
The cost of something is what you give up to get it.
Rational people think at the margin
People respond to incentives
How People Interact
Trade can make everyone better off
With trade, people can specialize in what they do the best
Markets are usually a good way to organize economic outcomes
Governments can sometimes improve economic outcomes
Government promotes efficiency and equity when market fails(breaks down)
How the Economy as a Whole Works
Standard living of a country
Measured in different ways:
Personal incomes
Ability to produce goods and services
Prices rise when the government prints too much money
Short-run trade-off
Inflation vs Unemployment
Philips Curve
Economic Models
Circular Flow Diagram
Production Possibilities Frontier
Positive statements - descriptive analysis
Normative statements - prescriptive analysis
e.g Farmer & Breeder
The legacy of Adam Smith & David Ricardo
Adam Smith
Performed a detailed analysis of trade and economic interdependence
David Ricardo
Developed the principle of comparative advantage
