COMPOSITE SUMMARY OF CHAPTERS 1

COMPOSITE SUMMARY OF CHAPTERS 1 - COMPOSITE SUMMARY OF...

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COMPOSITE SUMMARY OF CHAPTERS 1 – 18 Chapter One Summary – First Principles A market is a process where buyers and sellers transact business, trading what they have for what they want. The buyers are the consumers, the sellers are the producers. Making informed decisions and self interest are two fundamental assumptions in place. Markets determine the prices of goods and services. Markets determine what to produce, how to produce it, and who consumes the product. Those consumers with the highest Willingness To Pay will get the product. Those producers with the lowest costs of production get the sale. Prices allocate the scarce resources to their highest and best use. An economy succeeds to the extent that it delivers the goods to you – the consumer. Adam Smith wrote in ‘The Invisible Hand’, how individuals in pursuing their own self- interests, often end up serving the interests of society as a whole. Smith envisioned firms producing goods that are useful and wanted by the people, while the process of competition kept prices close to the cost of production . Opportunity Cost: Any economic choice requires making trade offs. You must include the value of the best foregone alternative sacrificed when you make a choice. Marginal Principle : Weighing the pros and cons, the costs and benefits; then making a decision. As long as the incremental benefit is > the new cost, then do it. Equilibrium: A position of rest where there is no tendency to change. Demand and Supply are in balance. A place where the benefit to both the producer and the consumer are maximized. No one can improve their position further (neither the producer or the consumer). Efficiency: When an economy is efficient, it is producing the maximum gains from trade possible, given the resource constraints you face. No one can be made better off, without making other people worse off. Questions (4) Chapter Two Summary – Economic Models “the ceteris paribus condition’ : This is Latin for “holding all other things constant.” This is done so that you can focus on the effects of changing just one, and only one, variable at a time. Usually it is just moving price and seeing what the resultant quantity demanded for a particular good will move to.
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Production possibilities Frontier : Starts us to think about choices in terms of what combinations of products in a simplified economy are possible. Trade offs. Scarcity. An increase in one good comes at the expense of the other. Points on the curve are said to be efficient. Everyone is benefited without making anyone worse off. You should strive to produce at points on the curve. Economic growth or expansion : Things causing outward shifts are more factors of production becoming involved, or better technology. Factors that cause contraction of production capability: flood, hurricane, war, fire. Disasters.
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