O'Dowd Peter MICRO STUDY GUIDE Chapters 1,2,(3),4,6,8 Economics and Economic Reasoning Economics study of how humans coordinate their wants and desires, given the decisionmaking mechanisms, social customs, and political realities of the society. Scarcity the goods available are too few to satisfy individuals' desires. Economic reasoning = making decisions on the basis of costs and benefits Marginal cost the additional cost to you over and above the costs you have already brought upon yourself. That means not counting sunk costs--which is costs that have already been incurred and cannot be recovered (already paid tuition so go to fuckin class because the marginal cost of going to class does not include tuition). Marginal benefit additional benefit above what you've already resulted in (the marginal benefit of reading this chapter is the additional knowledge you get from reading it...if you know this chapter already, there is no marginal benefit of reading it now) When comparing these two, follow the economic decision rule: o If the marginal benefits of doing something exceed the marginal cost, do it. o If the marginal costs of doing something exceed the marginal benefits, don't do it. Opportunity Cost The opportunity cost of undertaking an activity is the benefit missed by undertaking that activity. The benefit forgone is the benefit that you might have gained from choosing the next-best alternative. To obtain the benefit of something, you must give up (forgo) something else--namely, the next best alternative. The opportunity cost is the value of that next best thing. (Scarcity forces you to choose). Economic forces the necessary reactions to scarcity (if price did not ration food, there would not be enough food to go around--all scarce goods must be rationed in some fashion). Market force market force is an economic force that is given relatively free rein by society to work through the market (market forces ration by changing prices--when there is a shortage, price goes up; when there is a surplus, price goes down). Invisible hand the price mechanism--the rise and fall of prices that guides our actions in a market (the market works likes this...guiding economic forces to coordinate individual actions and allocate scarce resources). Economic forces are always working; society may allow market forces to operate. What happens in a society can be seen as a reaction to, and interaction of, economic forces, political forces, social forces and historical forces. Economic model a framework that places the generalized insights of the theory in a more specific contextual setting--or in an economic principle a commonly held economic insight stated as a law or general assumption. Theories, models, and principles must be combined with knowledge of real-world economic organizations to arrive at specific policy recommendations. The Invisible Hand Theory: When the quantity supplied is greater than the quantity demanded, price has a tendency to fall.
When the quantity demanded is greater the than quantity supplied, price has a tendency to rise. A market economy, through the price mechanism, will tend to assign resources efficiently. Microeconomics is the study of how individual choice is influenced by economic forces (such as the pricing of policy firms, households decisions on what to buy, how markets allocate resources among alternative ends), while macroeconomics is the study of the economy as a whole; it considers the problems of inflation, unemployment, business cycles, and growth. Economic Policies actions (or inaction) taken by government to influence economic actions (look at objective and subjective policy in the PowerPoint notes). Three categories of economics: Positive economics (the study of what is, and how the economy works), Normative economics (the study of what the goals of the economy should be), and the art of economics (the application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics). Trade, Trade-Offs, and Government Policy The production possibilities model shows trade-offs and can be presented both in a table and in a graph. Production possibility table is a table that lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs. An output is simply of an activity while an input is you put into a production process to achieve that output. Production possibility curve (PPC) a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs (measures the opportunity cost). There is a limit to what you can achieve, given the existing institutions, resources and technology. Every choice you make has an opportunity cost. You can get more of something only by giving up something else. Comparative advantage the ability to be better suited to the production of one good than to the production of another good (ex. of guns and butter...the opportunity cost of guns increases as we produce more guns because some resources are relatively better suited to producing guns rather than butter and vice versa). The principle of increasing marginal opportunity cost states that opportunity costs increase the more you concentrate on the activity. In order to get more of something, one must give up ever-increasing quantities of something else. Productive efficiency achieving as much output as possible from a given amount of inputs or resources. Laissez-faire an economic policy of leaving coordination of individuals' actions to the market (let events take their course, leave things alone). Specialization and trade create gains that make all better of--and lets countries consume beyond their production possibility curve. Outsourcing is the relocation of production once done in the United States to foreign countries. The law of one price states that wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country.
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