session2thinkinglikeaneconomist

session2thinkinglikeaneconomist - SESSION 2 SESSION 2 2...

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Unformatted text preview: SESSION 2 SESSION 2 2 Thinking Like an Economist SESSION 2: Thinking Like an Economist SESSION 2: Thinking Like an Economist Competitive Model What makes markets work? Competition Controls price-setting Determines allocation of goods and services Based on simplifying assumptions Individuals make rational choices in pursuit of self-interest Consumers maximize utility Firms maximize profits Markets are competitive Firms and consumers are price takers SESSION 2: Thinking Like an Economist SESSION 2: Thinking Like an Economist Competitive Model Again With the basic competitive model: The economy is efficient: no waste, impossible to make one person better off without making someone else worse off Distribution of goods and services is determined Need not be fair or equitable Econ profs salary versus Fine Arts prof. Skilled versus unskilled wages SESSION 2: Thinking Like an Economist SESSION 2: Thinking Like an Economist Incentives and Information For the competitive model to work Individuals need accurate information And have the incentive to act on that information Why work? Because you get paid to do so. Incentives and information provided by the price system Supported by well defined property rights SESSION 2: Thinking Like an Economist SESSION 2: Thinking Like an Economist Property Rights When well-defined and protected Determine ownership of resources Can be traded securely Underpin value creation When ill-defined Tragedy of the commons Ocean fishing When not protected Underinvestment Lack of foreign investment in Sub-Saharan Africa SESSION 2: Thinking Like an Economist SESSION 2: Thinking Like an Economist Comparative Advantage and Exchange Specialization and the Gains From Trade: Principle of opportunity cost explains the benefits from specialization and trade. PRINCIPLE of Opportunity Cost The opportunity cost of something is what you sacrifice to get it. SESSION 2: Thinking Like an Economist SESSION 2: Thinking Like an Economist An Example of the Gains from Trade Suppose that there are two individuals, Abe and Bea Both paint pictures and make pizzas But they are not equally productive Abe is inherently more productive than Bea in both tasks So can they gain from trade? SESSION 2: Thinking Like an Economist...
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session2thinkinglikeaneconomist - SESSION 2 SESSION 2 2...

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