econ notes - -Scarcity-Inability to satisfy desires with...

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-Scarcity -Inability to satisfy desires with available resources Economic Problem -How do we allocate scarce resources to satisfy limitless wants? -What to Produce -How to produce it -For whom to produce No such thing as…a free lunch Economic system : collection of institutions that determines how resources are allocated 3 canonical economic systems: Traditional Command Market Positive economics : What do we produce? How do we produce it? For whom are these goods produced? Answers are capable of verification - called positive statements Normative Economics : What should be produced, How should we produce, For whom should we produce? Answers can never be verified as correct : always involve value judgments, value judgments will never be universally compelling Positive vs. Normative economics: Generally committed to the idea of economics as a positive discipline -no discipline is logically adequate to defend normative statements Most economists embrace at least one normative idea as selfevident Efficiency: Consider how resources are currently allocated Imagine re-allocating resources in such a way that: Nobody is made worse off At least one person’s made better off Normative statement: Any re-allocation of resources that makes at least one person better off, and makes no person worse off, should be pursued Implication: We should only be satisfied with an allocation when it is impossible to make a person better off without making another worse off Pareto Efficiency: an allocation of resources is efficient if reallocating resources to make one person better off will necessarily make another person worse off What makes a good model: more closely a model corresponds to reality, the less useful it becomes
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Parsimony in model building demands that we make our models sufficiently realistic to capture the phenomenon of interest, but no more realistic Models should be judged on how useful they prove (and how accurate their predictions), rather than on how realistic their assumptions are Productio n- Process of transforming factors of production (inputs) into goods and services (outputs) Scarcity of factors of production limits the quantities of various outputs that can be produced Assume- 2 goods can be produced Production of these goods requires at least some common inputs The common inputs are limited in supply (scarce) The production decision reveals a tradeoff: If all productive resources are employed, then increasing output of one food implies that output of the other good will fall Production Possibilities Frontier (PPF)- shows the maximum quantity of one good produced for any given quantity of the other good produced PPF must be negatively sloped Points inside the PPF are inefficient If a point lies inside the PPF, either, productive resources are unused so those unused resources could be used to increase the output of at least one good or productive resources could be reallocated to increase output of one good without reducing output of the other All efficient allocations are represented by points on the PPF
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econ notes - -Scarcity-Inability to satisfy desires with...

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