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Chapter 1 (macro)

Chapter 1: The Central Idea

Scarcity and Choice

  • Scarcity: Limited resources against unlimited wants necessitating choices.

  • Choices lead to opportunity costs: Every choice incurs a cost of missed alternatives.

  • Economics: The study of choices made with scarce resources.

Economic Interactions

  • Economic interactions involve the exchange of goods and services between individuals.

  • Examples of interactions include:

    • College students purchasing education services from universities.

    • Teenagers offering labor in exchange for wages at fast-food restaurants.

  • A market functions as a venue for these exchanges.

Individual Choices

  • Two fundamental individual choices:

    1. Consumer Decisions: What to consume.

    2. Producer Decisions: What to produce.

  • Budget Constraint: Limits on spending dictated by available funds.

  • Opportunity Cost: The value of the next best alternative not chosen.

Opportunity Cost Explained

  • When facing decisions, rank alternatives to identify opportunity cost.

  • Examples of choices that compete with attending an 8 a.m. class:

    • Additional sleep.

    • Extended breakfast.

    • Extra time for school commute.

  • Opportunity costs vary across individuals depending on personal preferences.

Application of Opportunity Cost

  • Increased community college enrollment during the 2008-2009 recession can be explained through the lens of opportunity cost, as individuals may have sought education during economic downturns.

Gains from Trade

Concept

  • Gains from trade: Enhanced well-being through voluntary exchange of goods and services.

  • Example: Maria trades sunglasses for Adam's hat, benefiting both parties by obtaining what they prefer.

Visual Representation

  • Trade can lead to better allocation of resources allowing for mutual gains.

Specialization and Comparative Advantage

Definitions

  • Specialization: Focusing production efforts on a specific task.

  • Division of Labor: Splitting production processes among different workers based on tasks.

  • Comparative Advantage: Ability to produce a good at a lower opportunity cost than others.

Application in Production

  • Example: Emily the poet and Johann the printer decide on how best to use their skills given scarcity.

International Trade

  • International trade: Exchange of goods across national borders.

  • Gains obtained from trade are similar to those achieved within a domestic economy, facilitating better resource allocation and higher satisfaction.

Production Possibilities

Concepts

  • Production Possibilities: Shows combinations of good production achievable with the economy's resources.

  • Production Possibilities Curve (PPC): Graphical representation of maximum feasible production combinations.

Efficiency and Inefficiency

  • Efficient production combinations: located on the PPC curve, represents the maximum amount that can be produced with available resources

  • Inefficient production combinations: found inside the PPC curve, indicate that resources are not being utilized to their fullest potential, leading to less output than possible.

  • Points inside the curve signify inefficiency, while points outside are unattainable given current resources.

Shifts in the Production Possibilities Curve

  • Outward shift: economy displays growth since more goods and services can be produced

  • Examples:

    • Increased workforce.

    • More capital investments.

    • Technological advancements.

Economic Structures

Fundamental Questions

  • The three critical economic questions:

    1. What to produce?

    2. How to produce?

    3. For whom to produce?

  • Two main economic systems arise to address these:

    • Market Economy: Decisions made through market interactions.

    • Command Economy: Centralized decision-making by the government.

Elements of Market Economy

  • Key components:

    • Freely determined prices.

    • Defined property rights.

    • Incentives motivate economic actions

      • Example: implementing property rights for an invention gives the inventor incentive to produce the good

    • Freedom for trade in local and international markets.

Role of Government

Economic Systems

  • Capitalism: Individual ownership of capital with decentralized decision-making.

  • Socialism: Government ownership and control of production and decisions.

  • Mixed Economy: Combines elements of both capitalism and socialism.

Market Failures

  • Occur when market operations fail to achieve efficient outcomes, leading to the need for government intervention.

The Price System

Price System Function

  • serve as a signal about what should be produced and consumed when there are changes in tastes or technology

  • provides incentives to people to alter their production or consumption

  • also affects the distriution of income or who gets what in the economy

Price Responses in Crisis

  • Price systems adapt during national emergencies by changing prices to reflect scarcity.

  • Higher prices can incentivize production but may also restrict access for those in need during shortages.

Financial Crisis

  • disruptions to financial markets that make it difficult for people and business firms to borrow and obtain loans