The document discusses key economic concepts including rational choice theory, opportunity costs, comparative advantage, supply and demand, and market structures. It explains that individuals make optimal decisions by weighing costs and benefits at the margin. Trade-offs exist because resources are scarce, and opportunity costs represent the highest valued alternative forgone. Comparative advantage allows for gains from specialization and trade.
The document discusses key economic concepts including rational choice theory, opportunity costs, comparative advantage, supply and demand, and market structures. It explains that individuals make optimal decisions by weighing costs and benefits at the margin. Trade-offs exist because resources are scarce, and opportunity costs represent the highest valued alternative forgone. Comparative advantage allows for gains from specialization and trade.
The document discusses key economic concepts including rational choice theory, opportunity costs, comparative advantage, supply and demand, and market structures. It explains that individuals make optimal decisions by weighing costs and benefits at the margin. Trade-offs exist because resources are scarce, and opportunity costs represent the highest valued alternative forgone. Comparative advantage allows for gains from specialization and trade.
The document discusses key economic concepts including rational choice theory, opportunity costs, comparative advantage, supply and demand, and market structures. It explains that individuals make optimal decisions by weighing costs and benefits at the margin. Trade-offs exist because resources are scarce, and opportunity costs represent the highest valued alternative forgone. Comparative advantage allows for gains from specialization and trade.
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Natsagdorj 1
Nandin Natsagdorj Michael Manove Economics 101 15 September 2015 Chapter 1
People are rational- People weigh the costs and benefits
People respond to economic interests Optimal decisions are made at margin- optimal decisions is to continue any activities
up to the point where MB=MC
-Prices that reflect all opportunity costs provide the best incentives When deciding how many units to buy, sell or use, marginal benefits and marginal
costs should be compared.
The marginal benefit of the last unit that you buy should be at least as large as the marginal cost but they do NOT have to be equal
Trade off: Due to scarcity (unlimited wanted but limited resources), producing more of one good/service means producing less of another Opportunity cost: The highest valued alternative that must be given up to engage in an activity (The sacrifice) Centrally Planned Economy: an economy which government decides how economic resources are allocated Market Economy: Decisions of households and firms interacting in market allocate economic resources. -
Market economies rely on privately owned firms to produce goods and serives Meets wants of consumers Firms compete for quantity at the lowest price Competition will force firms to continue producing and selling goods and services as long as the Marginal Benefit to Consume > Marginal Cost to Produce
Natsagdorj 2 Mixed Economy: Government plays a significant role in the allocation of resources Productive efficiency: Good service produced at the lowest possible cost Allocative efficiency: Production in accordance with consumer or societys preferences Equity: Fair distribution of economic benefits Positive Analysis: The what is Normative Analysis: The what ought to be Production: the transformation of some goods and services (inputs) to other goods and services (outputs) Distribution: In primitive economies, people produce for themselves and consume most of their own production. -
In more complex economies, efficient specialist producers use large quantities of
inputs to produce large quantities of outputs.
Outputs must be distributed to consumers. Inputs must be distributed to producers.
Wealth: refers to the capacity to create valued goods and services.
Wealth takes many forms: 1. Physical capital, (buildings, roads, machines, ships, cars, stores and warehouses filled with goods; 2. Human capital: education and training, which makes people more productive; Good governmental institutions; 3. Social capital: productive social and economic organizations, private and public. Economists want to understand why some societies have far more wealth than others. Economic Agents:agent is economic jargon for a person or group that plays an active role in the economy 1. Households: individuals living alone, or small groups living together (often related) and making joint economic decisions. 2. Firms: individuals producing alone, or groups of people producing together. 3. Governments: groups of people who jointly regulate households and firms. - Governments may be viewed as specialized firms with regulatory functions.
Natsagdorj 3 -
Governments also provide public goods, [to be discussed later].
Households, firms and governments are composed of many of the same people, playing different roles.
Natsagdorj 4 Chapter 2: Trade offs, Comparative Advantage, and the Market System
Productive Possibilities Frontier: A curve showing the maximum attainable maximum
combinations of two products that may be produced using current resources -
Inside frontiers are inefficient
Outside frontiers are unattainable Trade-offs are illustrated Economy moves down from PPF it is experiencing an increased marginal opportunity
cost The more the resources used for an activity the smaller the activity? Outwards shift of the PPF means economic growth. Economic Growth: is the ability of an economy to increase the PPF
Trade: act of buying and selling
People trade on the basis of comparative advantage Comparative advantage: producing good/service at the lowest opportunity cost- People are better off specializing in an specific good or service and trading that with another Absolute advantage: Producing more of a good or service using the same resources
Natsagdorj 5 Chapter 3: Demand and Supply Perfect competition: A market structure that has 1. 2. 3. 4. 5. 6.
One homogeneous good
Many sellAers and buyers Voluntary exchange Full information and perfect foresight Rational, self-interested agents Free entry to the market
