Mircro Chapt 1 Exam 1

  1. Principles
    • for the individual choice
    • for the choice interaction
    • for the economy-wide interaction
  2. Individual Choice
    Individual choice; the decision by an individual of what to do, or what not to do
  3. Basic Principles
    • Resources are scarce
    • the real cost of something is what you must give up to get it
    • "How much?" is a decision at the margin
    • People usually take advantage of incentives
  4. Resources Are Scarce
    • A resource is anything that can be used to produce something else
    • ex: kand, labor, capital
    • resources are scarce: unlimited needs with limited resources
    • ex: fossil fuels, lumber, (clean), water/ air, intelligence
  5. Real Cost = what you must give up
    • the real cost of an item is it OPPORTUNITY COST: what you must give up in order to get it
    • Opportunity cost is crucial to understanding individual choice
    • Its all about what you have to forgo, but remember its the forgone value of the BEST ALTERNATIVE ACTIVITY ONLY, not the sume of all
  6. Decision at the Margin
    Trade off b/w costs and benefits of doing something
  7. Marginal benefit-cost analysis
    • making trade off at the margin
    • comparing the costs and benefits of doing a little bit more of an activity vs. doing a little bit less
  8. Taking advantage of incentives
    • An incentive is anything that offers rewards to people who change their behavior
    • ex: wage increase -> more people want to work
    • Ex: price of gasoline increase -> more people demand fuel- efficient vehicles
    • People respond to these incentives (or, disincentives)
  9. Interaction: How Economics Work
    Interaction of choices: my choices affect your choices, and vice versa
  10. Basic Principles
    • There are gains from trade
    • markets move toward equilibrium
    • efficient usage of resources is a good thing for the society
    • markets usually lead to efficiency
    • when markets fail, government intervention can improve social welfare
  11. Gains from Trade
    • Trade in a market economy: provide goods and services to others and receive other g/s in return
    • Gains from trade: get more of what they want through trade than they could under self sufficiency...
  12. Gains from trade....Due to specialization
    • each person specializes in the task that he or she is good at performing
    • the economy, as a whole, can produce and consume more
  13. Equilibrium
    • in an economic sense is a situation when no individual woul be better off doing something defferent
    • anytime there is a change the conomy will move to a new equilibrium
  14. Economic efficiency
    an economy is efficient if all opportunities are take to make people better off w/o making other people worse off
  15. Is economic efficiency always the best policy goal?
    issue of efficiency vs. equity
    • equity: everyone gets his/her fair share..."Fair"?
    • Ex. Handicapped -designaed parking spaces in a bus parking lot
    • Equity side: making life "fairer"for the andicapped people
    • Efficiency side: letting several parking spaces left unused
    • How far should we go?
  16. Markets Usually Lead to Efficiency
    • The incentives built into a market economy help resources be used efficiently
    • Prices are set where buyers and sellers agree with
    • No opportunities are left unexploited

    Exceptions: market failure
  17. Exceptions: market failure
    • the individual pursuit of self-interest in the markets can make society worse off
    • the market outcome is inefficent
  18. Market failure (cont)
    Negative Externalities
    • when producers (sellers) shift cost to others
    • Pollution, for ex, is a by product of manufacture
    • Total cost = seller's production cost + pollution cost
    • When pollution costs are shifted, supply is greater than socially optimal, and so is the pollution
  19. Positive externalities
    • when consumers (buyers) may create benefits for others
    • vaccinnations, for ex, can prevent neighbors from getting the flu
    • Total benefit= individual benefit + benefits to others
    • when more people enjoy "free ride" the aggregate demand for vaccinations is less the socially optimal
  20. Government Intervention for Makret Failure
    • The markert outcome is socially optimal (socially efficient) only when...
    • the sellers pay the full costs of production
    • the buyers capture the full benefits of g/s
    • Government can help the market achieve the socially efficient level of outcome with regulations, taxes, and fines (for negative externalities) or subsidies (for positive externalities)
  21. Economy- Wide Interactions
    Basic Principles
    • 1. One person's spending is another person's income
    • If you spend less at a grocery store, ther employees may either lose their jobs, or take pay cuts
    • 2. Overall spending may exceed or fall below the economy's production capacity (or potential output)
    • if spending exceeds potential output, inflation is likely
    • if spending falls below pontential output, economic recession and increase in unemployment are likely
    • 3. Government policies can change spending
    • Monetary/fiscal policies
Card Set
Mircro Chapt 1 Exam 1
Basic Concepts of Economics