econ test 1 - Economicissuesandconcepts 16:48

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Economic issues and concepts 16:48 Interaction of self-interested people creates a spontaneous social order—the  economy is  self organizing Self-interest, not benevolence is the foundation of economic order Adam Smith(wealth of Nations) Efficiency  means that the resources are organized so as to produce the largest  possible amount of the goods and services that people want to purchase Characteristics of market economies Self-interest guides individuals Individuals respond to incentive Prices and quantities are set in (relatively) free markets in which individuals  trade voluntarily Institutions, created by the state, protect private property and enforce  contractual obligations Economics is the study of the use of  scarce resources  to satisfy unlimited  human wants A societys resources are divided into  land, labor and capital Economists refer to resources as  factors of production Outputs are  goods (tangibles) or  services (intangibles) Resources can produce only a fraction of the goods and services desired by  people Scarcity implies the need for  choice Every choice has an associated cost- opportunity cost- the benefit given up  by not using resources in the  best alternative way
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Book 1.1 The circular flow Individuals own factors of production. They sell the services of these factors to  producers in  factor markets  and receive payment in return The payment becomes their (factor) incomes Producers transform factor services into goods and services, which they then sell  to individuals in  goods markets , receiving payment in return The payment becomes the incomes of producers Maximizing decisions People are  maximizers Consumers maximize utility, producers maximize profits Marginal decisions All decisions are based on weighing  marginal cost  against  marginal benefit Complexity of production Production usually displays two characteristics noted long ago by Adam Smith:  specialization  and the  division of labor Specialization-the allocation of different jobs to different people, it is more  efficient than self-sufficiency bc Individual abilities differ- comparative advantage Focusing on one activity leads to improvements- learning by doing Specialization must be accompanied by trade
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Book 1.2 Money eliminates the cumbersome system of  barter  by separating the  transactions involved in the exchange of products, thereby facilitating  specialization and trade Types of economic systems traditional  command free-market in practice, every economy is a  mixed economy  in the sense some decisions  are made by firms and households and some by the govt
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This note was uploaded on 03/17/2011 for the course PHYSICS 2001 taught by Professor Young during the Spring '08 term at LSU.

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econ test 1 - Economicissuesandconcepts 16:48

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