HUBBARD_MICRO_SG_01 - 1 Economics: Foundations and Models...

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Chapter 1 Economics: Foundations and Models Chapter Summary People must make choices as they try to attain their goals. These choices usually mean that people must accept trade-offs among various competing objectives due to society’s limited resources. Economics is the study of the choices people make to attain their goods, given their scarce resources. Economists assume that people are rational, respond to economic incentives, and make decisions at the margin. Economists construct models , simplified versions of some aspect of economic life, to analyze economic issues such as how buyers and sellers make decisions. Every society faces the economic problem of limited resources. Therefore, society can produce only limited quantities of goods and services. Societies face trade-offs and must consider the opportunity costs of decisions, particularly when answering the three fundamental questions any economy must answer: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services? Societies organize their economies in two main ways to answer these questions. A society can have a centrally planned economy characterized by extensive government decision making. Or, a society can have a market economy where resource allocation is determined by the decisions of households and firms interacting in markets. All high-income democracies have market economies or mixed economies. A mixed economy is a market-based economy with some government intervention. Market economies tend to allocate resources more efficiently than do centrally planned economies, but efficient outcomes may not be perceived as fair. Determining what is a fair or equitable outcome calls for the application of normative analysis what ought to be . Positive analysis is concerned with what is . While most or all economists can agree on the results of positive economic analysis, their opinions often differ on what ought to be . Microeconomics is the study of how individual choices are made by households, firms, and the government. Macroeconomics is the study of the economy as a whole. The Appendix to Chapter 1 provides a review of basic mathematical tools and techniques that will be applied through the textbook.
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CHAPTER 1 | Economics: Foundations and Models 2 Learning Objectives When you finish with this chapter, you should be able to: 1. Discuss these three important ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Economists use these ideas to analyze the way people make decisions. These ideas are especially important in analyzing what happens in markets, which is the primary focus of economic analysis. 2. Discuss how an economy answers these questions: What goods and services will be produced?
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This note was uploaded on 05/19/2008 for the course ECO 001 taught by Professor Gunter during the Spring '06 term at Lehigh University .

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HUBBARD_MICRO_SG_01 - 1 Economics: Foundations and Models...

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