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Econ_100_Ch5 - ECON 100 Introduction to Microeconomic...

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Slide 1 of 25 ECON 100: Introduction to Microeconomic Theory Lecture 7 Yilan Xu
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Slide 2 of 25 Markets Link to Each Other A simple Valentine’s Day gift becomes much more complex after closer inspection and involves, among others, the following: § Kenyan flower growers, § Dutch clocks, § British airplanes, § Colombian coffee, § Finnish cell phones.
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Slide 3 of 25 Markets Link to Each Other Giving this one gift to a significant other requires the cooperative effort of millions. What economists find amazing is that this immense cooperation is voluntary and undirected. The millions of people involved in bringing this gift to market do not care about the romance of Valentine’s Day but rather their own self-interest.
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Slide 4 of 25 Markets Link to Each Other The story above illustrates how markets are interconnected. Furthermore, a change in supply or demand in one market can influence markets for entirely different products thousands of miles away. How then are limited resources allocated to satisfy as many wants as possible when some market change occurs?
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Slide 5 of 25 CHECK YOURSELF Ø To encourage the use of alternative energy sources, the U.S. government offers a subsidy for the conversion of corn to ethanol, in effect raising the price of corn used as ethanol. If farmers receive a higher price for turning corn into ethanol, what will happen to the price of corn used in cafeteria meals and in cornbread used in restaurants? How will cafeterias and restaurants respond to this?
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Slide 6 of 25 CHECK YOURSELF Ø Sawdust is used for bedding milk cows. What did the end of the housing boom in 2007 do to the price of milk? Search for “sawdust” at http://www.MarginalRevolution.com if you need a hint.
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Slide 7 of 25 Solving the Great Economic Problem Central planning is an approach where a single official or bureaucracy is responsible for the allocation of limited resources. Such an approach suffers from two significant problems. 1. The substantial amount of information necessary to optimally allocate limited resources.
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