Econ - Unit 1 - Wednesday 12:38 PM Principles of economic...

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1/23/2008 Wednesday, February 20, 2008 12:38 PM Principles of economic interaction 1. People (firms) face trade-offs, there is no free lunch 2. The cost of something is what you give up to get it (opportunity cost) 3. Rational people think at the margin (i.e. at the edge) 4. People respond to incentives (ethanol production, taxes, etc) 5. Trade can make everyone better off 6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcome, or correct “market failures” 8. A country’s standard of living depends on its abilities to produce goods and services (productivity and growth) 9. Prices rise (inflation) when the government prints too much money 10. Society faces a short run trade-off between inflation and unemployment Microeconomics and Macroeconomics Microeconomics focus on the individual parts of the economy How the households and firms make decisions and how they interact in specific markets Macroeconomics look at the economy as a whole Economy-wide phenomena, including inflation, unemployment, and economic growth Thinking like and Economist Economics trains you to Think in the terms of an alternatives Evaluate the cost of individual and social choices Examine and understand how certain events and issues are related The Economist as a Scientist The economist way of thinking… Involves thinking analytically and objectively Makes use of the scientific method 1/28/2008 Wednesday, February 20, 2008
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12:42 PM Interdependence and the gains from trade How do we satisfy our wants and needs in a global economy? We can be economically self-sufficient We can specialize and trade with others, leading to economic interdependence Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity But this gives rise to two questions: Why is interdependence the norm? Expands the possibility production frontier Helps each country Interdependence occurs because people are better off when they specialize and trade with others What determines the pattern of production and trade? Patterns of production and trade are based upon differences in opportunity costs. Example Imagine an economic system with only two goods, potatoes and meat, and only two people, a potato farmer and a cattle rancher What should each person produce? Why should these people trade? Suppose the farmer and rancher decided not to engage in trade: Each consumes only what he or she can produce alone The production possibilities frontier is also the consumption possibilities frontier Without trade, economic gains are diminished. They could be greater but not since they decided to be self-sufficient Suppose instead, the farmer and the rancher decide to specialize and trade… Both would be better off if they specialize in producing the product
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This note was uploaded on 04/10/2008 for the course ECON 1015 taught by Professor Myounglee during the Spring '08 term at Missouri (Mizzou).

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Econ - Unit 1 - Wednesday 12:38 PM Principles of economic...

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