Chapter 1 - Introduction to economics - ECON100

Everyday economics

You cannot buy everything, which leads you to have to make choices

stores choose what to stock

these choices interact to shape the economy

What is the economy?

A system for coordinating production and delivery

studies production, distribution, and consumption 

Command economy

Central office decides, government decides what is produced, how much of a good is sold (USSR, pre-1980’s China)

Market economy

Millions of decentralized decisions (US market today) 

Most countries use this type of economy with some small government roles 

The invisible hand

The self-interested actions of individuals in a free market that unintentionally benefit society as a whole

Invisible hand can fail

Some self-interested actions can hurt others instead of benefit

Examples: air/water pollution, overfishing

result is society is worse off then it could be

Microeconomics 

Small picture 

Looks at individuals, households, and businesses 

Examples: Why does Starbucks change coffee prices, why do people choose cars vs. buses? 

Macroeconomics

Big picture
Looks at the whole economy

Examples: Why do recessions happen? Why are prices raising everywhere?

Scarcity

Limited availability of resources (time, money, labor, land)

Examples: Deciding to buy a mini fridge or a bookshelf for your dorm because of limited space; factory’s can only hold a certain number of people so you have to hire limited workers

Opportunity cost

What you give up by choosing the next best alternative 

Ex. By taking ECON100 instead of MATH100, means forgoing toe benefits of taking MATH100.

The opportunity cost of buying a good is

The value of the next best alternative you could have purchased

Marginal analysis

Weighing the benefits of doing a bit more of an activity against its cost

Ex. Deciding how much time to spend studying for chemistry vs. economics

Marginal analysis is primarily concerned with

Comparing the additional benefits and additional costs of an activity 

Incentives

Rewards or punishments that motivate behavior

Individuals and firms exploit opportunities to make themselves better off

Example: A sale prompts consumers to buy more; higher wages prompt more labor supply

Trade

People divide tasks and exchange goods or services they specialize in

There are gains from trade (principles of interaction)

Specialization → increased productivity → everyone gets more of what they want 

Example: Amber is good at math and Jojo is good at physics. Amber helps Jojo with math and Jojo helps Amber with physics. 

Modern relevance: We specialize in careers because we can rely on markets to access goods and services

Markets move towards equilibrium (principles of interaction)

No individual can be better off doing something different

Examples: Checkout lines: New register opens → people rush → lines eventually equalize

Why it happens: People respond to incentives and seek the best opportunities

You are deciding whether to major in engineering or music. You learn that because there are fewer engineers, it is easier to find a job. And there are too many musicians, it is harder to find a job. You major in engineering, this means: Markets tend to move towards ______ as individuals respond to incentives.

Efficiency (principles of interaction)

All opportunities to make someone better off without hurting others are used

Example: Limit the amount of eggs a person can buy in the store due to shortage of eggs

____ in allocation means resources are used to maximize customer wellbeing

Spending = someone else’s income (principles of interaction)

Your purchase is a firm’s revenue and workers wage

If one group cuts spending, others’ incomes will fall

Chain reactions can amplify slumps

When spending misaligns with capacity

Too low: unemployment and idle factories

Too high: Inflation (prices rise broadly)

Policy tools: Government spending/taxes, money and credit

Long-run growth (principles of interaction)

Over decades, living standards tend to rise 

Drivers: technology, skills (human capital), institutions 

Sustainability

Protecting the environment while growing economy