NOTES1.201 - Economics and economies Let's begin our study...

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1 Economics and economies Let’s begin our study of microeconomics with a definition of economics. Some definitions are quite ponderous, and filled with technical sounding words. But there is a very concise definition of this subject. Namely, Economics is the study of exchange and those activities and institutions which motivate, affect, or otherwise relate to exchange. We will refer to the things that are being exchanged or traded as goods and inputs . Goods may safely be thought of as those things which households (small, cooperating groups of people) wish to possess or use (consume) while inputs are those things which can be used to create (produce) goods. (more technically, a good is anything such that, if a person has the choice of consuming a larger quantity or a smaller quantity, she'll choose to consume the larger quantity, ceteris paribus) Those organizations which carry out production are usually referred to as firms. (In a private ownership economy , most or all resources, and therefore firms, are owned by households). So then, principal among those activities of interest to economists are consumption and production, often very broadly defined. Knowing what economics is, we are ready to think about what an economy is. We will think that An economy consists of agents who have resources at their disposal and whose behavior is subject to constraints . The term "agent" simply refers to the entities engaging in exchange. Often we will use the term household or consumer instead of the term agent. Keep in mind that agents may trade with each other, or through organizations that they create and manage. A firm is one such organization. The term "resource" refers to anything that can function as a good or input. Be aware that something could function as either a good or input (not at the same time of course). Perhaps the most important example of such a thing is an individual’s time and energy. Now, there are two types of constraints on behavior that agents face. One type will be referred to as the technological constraints faced by agents. These constraints are the constraints on behavior (keep in mind, production and consumption are behaviors) that result from the laws of nature and human knowledge of these laws. In short, there are things we can do and things we can't do simply because that's the way the physical universe works. Note that the economy's technology is a part of this set of constraints. We can define technology as the rules that must be followed in combining inputs to produce a specific quantity of a particular good. Also note that as our knowledge of the laws of nature deepens and broadens, new ways of combining inputs (as well as new inputs) to produce goods are discovered. This phenomenon is referred to as technical progress . The other type of constraint that agents face will be referred to as the
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This note was uploaded on 04/16/2008 for the course ECON 2010 taught by Professor Aljamal during the Spring '06 term at Western Michigan.

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NOTES1.201 - Economics and economies Let's begin our study...

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