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Efficiency
when society gets the most from its scarce resources
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Equity
- when prosperity is distributed uniformly among society’s members
- Govt may alter market outcome to promote equity
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market economy
allocates resources throughthe decentralized decisions of many house holds and firms as they interact in markets.
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Market failure
when the market fails to allocatesociety’s resources efficiently
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Market power
a single buyer or seller has substantial influence on market price (e.g. monopoly)
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The most important determinant of living standards
productivity
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productivity
the amount of goods and services produced from each hour of a worker’s time(goods/hour)
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Inflation
increases in the general level of prices
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The 4 principles of decision making are:
- -People face tradeoffs.
- -The cost of any action is measured in termsof foregone opportunities.
- -Rational people make decisions by comparing marginal costs and marginal benefits.
- -People respond to incentives.
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The 3 principles of interactions among people are:
- -Trade can be mutually beneficial.
- -Markets are usually a good way of coordinating trade.
- - Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable.
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Circular-Flow Diagram:
- a visual model of the economy, shows how dollars flow throughmarkets among households and firms
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Factors of production:
- the resources the economy uses to produce goods & services including
- - labour
- - land
- - capital (buildings & machines used inproduction)Copyright
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The Circular-Flow Diagram : Households
- - Own the factors of production,sell/rent them to firms for income
- - Buy and consume goods & services
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The Circular-Flow Diagram: Firms:
- - Buy/hire factors of production,use them to produce goodsand services
- - Sell goods & services
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Production Possibilities Frontier (PPF)
- a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the availabletechnology
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Microeconomics
the study of how households and firms make decisions and how they interactin markets.
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Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment,and economic growth.
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positive statements
attempt to describe the world as it is.(dont have to be correct)
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normative statements
attempt to prescribe how the world should be.
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Why Economists Disagree
- different values
- different judgements
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Propositions about Which Most Economists Agree
- A ceiling on rents reduces the quantity andquality of housing available. (93%)
- Tariffs and import quotas usually reduce generaleconomic welfare. (93%)
- A large federal budget deficit has an adverseeffect on the economy (83%)
- Flexible and floating exchange rates offer aneffective international monetary arrangement.(90%)continued…Copyright © 2011 Nelson Education Limited 34Propositions about Which MostEconomists Agree (and % agreeing)
- Cash payments increase the welfare of recipients toa greater degree than do transfers-in-kind of equalcash value. (84%) A minimum wage increases unemployment amongyoung and unskilled workers. (79%)
- Effluent taxes and marketable pollution permitsrepresent a better approach to pollution controlthan imposition of pollution ceilings. (78%)
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Absolute advantage:
the ability to produce a good using fewer inputs than another producer
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Comparative advantage:
- -the ability to produce a good at a lower opportunity cost than another producer
- -Absolute advantage is not necessary for comparative advantage
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competitive market
one with many buyersand sellers, each has a negligible effect on price
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perfectly competitive market
- - All goods exactly the same
- - Buyers & sellers so numerous that no one can affect market price – each is a “price taker”
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Law of demand (or Law of diminishing marginal benefit)
- -the quantity demanded of a good falls when the price of the good rises, other things equal
- -creates a downwards slope
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normal good
- -positively related to income.
- -Increase in income causes increase in quantity demanded at each price, shifts D curve to the right
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inferior good
- -negatively related to income.
- -An increase in income shifts D curves for inferior goods to the left.
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substitutes
Two goods are substitutes if an increase in the price of one causes an increase in demand for the other
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complements
Two goods are complements ifan increase in the price of onecauses a fall in demand for the other
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5 Demand Curve Shifters
- # of buyers
- Income (Normal and Inferior goods)
- Prices of other goods (substitutes compliments)
- Tastes
- Expectations
- (price causes movement along D curve not shift)
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Law of supply:
- -the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
- -creates an upwards slope
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4 Supply Curve Shifters
- Input Prices
- Technology
- # of Sellers
- Expectations
- (Price causes a movement along the S curve not shift)
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surplus
if the market price is above equilibrium a surplus of goods is the result which causes the price to fall.
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shortage
If the market price is below equilibrium,a shortage results, causing the price to rise
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