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Unformatted text preview: Principles of Economics I
Economics 101 Section 400 Class 1 SCARCITY The inability to satisfy desires with available resources. Scarcity abounds! 1/7/2008 Class 1 2 The Economic Problem
How do we allocate scarce resources to satisfy limitless wants?
What to produce? How to produce it? For whom to produce? Important implication: "there's no such thing as a free lunch"
Class 1 3 1/7/2008 Economic Systems An economic system is a collection of institutions that determines how resources are allocated Often think of three canonical economic systems:
Traditional Command Market i.e. Determines how the three questions will be answered 1/7/2008 Class 1 4 Positive Economics We can ask the simple questions:
What do we produce? How do we produce it? For whom are these goods produced? The answers to such questions are (at least notionally) capable of verification We call such statements "positive" 1/7/2008 Class 1 5 Normative Economics We can ask more complex questions
What should be produced? How should we produce? For whom should we produce? Answers to such questions can never be verified as correct
Always involve value judgments Value judgments will never be universally compelling We call such statements "normative"
Class 1 6 1/7/2008 Positive v Normative Economics Generally commitment to the idea of economics as a positive discipline No discipline is logically adequate to defend normative statements Most economists think this makes them seem much more like scientists Despite this, most economists embrace at least one normative idea (whether implicitly or explicitly) as selfevident Class 1 7 1/7/2008 Efficiency Consider how resources are currently allocated Imagine reallocating resources in such a way that: Do you think that such a reallocation should take place? Class 1 8 Nobody is made worse off At least one person is made better off 1/7/2008 Example Amy, Bill and Chris all buy iPods Amy would be happier if she had a white one Bill would be happier if he had a black one Do you think that the allocation of iPods should change? Class 1 9 Amy's is black Bill's is white Chris's is silver 1/7/2008 Efficiency Normative statement: Any reallocation of resources that makes at least one person better off, and makes no person worse off, should be pursued. 1/7/2008 Class 1 10 Efficiency Implication: We should only be satisfied with an allocation when it is impossible to make a person better off without making another worse off. 1/7/2008 Class 1 11 Efficiency Pareto Efficiency: An allocation of resources is efficient if reallocating resources to make one person better off will necessarily make another person worse off. 1/7/2008 Class 1 12 Course Goals To analyze the way in which markets direct resources To determine how efficiently markets allocate resources To contemplate remedies when markets fail to allocate resources efficiently i.e. can we improve upon the market outcome to make some people better off without making anybody worse off?
Class 1 13 1/7/2008 ...
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