Principles of Economics Chap 1, 2, and 3 PDF

Preview

Summary

Detailed notes from Mankiw's textbook on chapters 1, 2 and 3....

Description

Chapter 1: Ten Principles of Economics - Scarcity → The limited nature of society’s resources - Economics → The study of how society manages its scarce resources - How people spend, save, work, invest - What and how much they buy - Principle 1: People Face Trade-offs - One tradeoff common in economics is “efficiency vs equality (equity) - Efficiency → Society getting the most it can from its scarce resources - Equality → Better said as equity, is distributing economic prosperity uniformly amongst all members of society - Efficiency is the size of the economic pie, equality is the individual slices of the pie - These two work in conflict, the more one seeks for equality the smaller they make the pie - Principle 2: The Cost of Something is What You Give Up to Get it - Opportunity Cost → What you give up to get something else - Not just the price of the item but the cost of what else you could have done with it - Principle 3: Rational People Think at the Margin - Rational People → People who systematically and purposefully do the best they can to achieve their objective - Marginal Change → A small incremental adjustment to a plan of action - Adjustments made around the edge of what you are doing. Not drastic differences but slight variances - People compare Marginal Benefit with Marginal Cost - This means you do not include sunk cost - Principle 4: People respond to Incentives - Incentive → Something that engenders someone to act - They can have some unintended consequences because it can have effects on the buyer, seller, and surrounding community - Principle 5: Trade Can Make Everyone Better Off - Trade allows for specialization, allowing you to work at what you do best, and trade for other items which you are not as efficient at producing - People can buy a greater variety of goods at a lower cost - Principle 6: Markets are Usually a Good Way to Organize Economic Activity - Market Economy → An economy that allocates resources through the decentralized decisions of many firms and households as they interact in the market for goods and services

-

-

-

-

-

“Invisible Hand” always guides the economy to equilibrium and desirable outcome Principle 7: Governments Can Sometimes Improve Market Outcome - Government has to be there for monitor and enforce the rules which the economy can operate under, most importantly Property Rights - Government can mainly help with the equality part of economics - Property Rights → The ability of an individual to own and exercise control over scarce resources - Market Failure → A situation in which a market left on its own fails to allocate resources efficiently - Externality → The impact of one person’s actions on the well-being of a bystander (A type of market failure) - Pollution is an example, because one company's pollution can cause negative effects on others leading to a possible market failure - Market Power → The ability of a single person or firm to have substantial influence on market prices Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services - Standards of living are highly dependent on the country's productivity - Productivity → The quantity of goods and services produced per unit of labor Principle 9: Prices Rise When the Government Prints Too Much Money - Inflation → An increase in the overall level of prices in the economy - Caused by the large quantities of money - When there is a large money supply the value of money falls because it is very available, thus meaning it takes more dollars for the same item Principle 10: Society Faces a Short Run Trade-off between Inflation and Unemployment - Increase the supply of money in the economy stimulates spending thus increased demands for goods etc - Increased demand means firms increase prices and also hire more workers - This means more people are being hired, this lower unemployment and higher inflation - Business Cycle → Fluctuations in economic activity, such as employment and production . . . largely irregular and unpredictable

Chapter 2: Thinking Like an Economist - The Scientific Method: Observation, Theory, and More Observation - Economics is a science because economics use the scientific method - Developing and testing of theories to devise how the world works - You observe something, create a theory, and observe if there is a correlation between what you saw and a large sample size tested hypothesis - Very difficult to test in economics because you have to work with whatever data is obtainable, can't make things happen to test your theories - The Role of Assumptions - We make assumptions to simplify the issues we are looking at so that once we get a grasp on those we can understand complex variations better - Assumption that everything is more elastic in long run - Assumption that prices are fixed in short run sometimes - Economic Models - Basic charts/graphs and complex equations - Omits unnecessary information to get broad overview from charts and graphs - Circular Flow Diagram → A visual model of the economy that shows how dollars flow through the markets among households and firms

-

Productions Possibility Frontier → A graph that shows the combinations of outputs that the economy can possibly produce given all available factors and the available production technology - Inside the curve is inefficient, on the curve is max production

-

-

-

-

-

(efficient) and outside the curve is impossible given factors Opportunity cost of the output on x-axis is the slope of the curve Bowed out graph, so opportunity cost is not constant - When looking at graph, when there is a large amount of an output the opportunity cost of making another is high - This is because at such a high output of product X those making it are usually labor unskilled in that area, so by letting them work on output Y won’t change the amount of output X you get significantly The graph can shift due to technological advances allowing more production of a certain product - Can increase outwards at both endpoints if workforce grows

Microeconomics and Macroeconomics - Microeconomics → the study of how households and firms make decisions and how they interact with each other in markets - Macroeconomics → The study of economy wide phenomena, including inflation, unemployment, and economic growth The Economist as Policy Adviser - Positive Versus Normative Analysis - Positive Statements → Claims that attempt to describe the world as it is . . . “Minimum wage laws cause unemployment” - Normative Statements → Claims that attempt to prescribe how the world should be . . . “The government should raise the minimum wage” - Positive statements can be proven using data, Normative statements are based on opinion and values Differences in Scientific Judgement - People can presume, interpret, or speculate about the outcomes of a test

or theory thus giving them differing positives views - These differing positives views leads to their normative views being drastically different - Normative values greatly influence people’s views on economic solutions Chapter 3: Interdependence and the Gains from Trade - Comparative Advantage: The Driving Force of Specialization - Absolute Advantage → The ability to produce a good using fewer inputs than another producer (Basically who can produce the most) - Comparative Advantage → The ability to produce a good at a lower opportunity cost than another producer - A producer who gives up less of other goods to produce Good X has a smaller opportunity cost of producing Good X thus having a comparative advantage - You can have an absolute advantage in both producing both goods, but can only have a comparative advantage in producing one good - Comparative Advantage and Trade - Through specialization based on comparative advantage, the economic pie will grow, so total production in the economy grows - People can get the goods which they do not produce at a lower cost, because what they receive for a certain amount when trading is greater - Trading Price Rule → For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs - Has to be in middle so one party wants to sell and one party wants to buy - Price above your opportunity cost then you want to sell - Price below your opportunity cost then you want to buy - Imports → Goods produced abroad and sold domestically - Exports → Goods produced domestically and sold abroad -...