Microeconomics - 1/15 What is Economics Economics is the...

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1/15 What is Economics? Economics is the study of how individuals and societies choose to allocate scarce resources Choice: Scarce: finite number of things What is scarcity? What “resources” are scarce”? Natural resources - oil Skilled labor – only a certain amount of people with those skills Time: 24 hours in a day (any time used for one resource can’t be used for another) “There is no such thing as a free lunch I) Opportunity Cost A) Scarcity – Opportunity costs 1) Opportunity cost – the value of a good in its next-best use 2) Opportunity cost: the value of the next best alternative that is forgone when a decision is made 3) Example: Decision to get a graduate degree II) Marginal vs. Sunk Decisions A) In decision making, only the marginal decision matters 1) Example: Continuing in college 2) Example: The price of an airplane seat B) Sunk Decisions 1) Decisions that have been made, costs that have been incurred, and cannot be gained back III) Economic Efficiency A) Efficient Outcome: 1) No reallocation of resources could result in an economic improvement 2) In your own decision making process: a) If you could make yourself better=off, you would 3) In the economy a) How does every individual decision-making process converge to create efficiency in the economy? IV)The Power of the Price System A) Two ways to coordinate decision making processes in an economy: 1) Command and Control a) Central Planner makes all decisions: Former Soviet Union, Cuba, Cambodia 2) Price System in Free market Economy B) Trade-off between Equity and Efficiency (reason one why a pure free market system will next exist) C) Market failures (reason two) D) The power and beauty of the market: 1) Question: how are all of the items you want available at the store?
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2) How were these items and why were these items developed? 3) How is it that we are able to purchase them? E) Dictate available products 1) What should be available in the store V) The Elegant Price System A) Why Elegant? 1) Accomplishes a lot in a simple and parsimonious way B) Assumption: 1) As each individual goes through decision making process: Exchange will not take place unless all parties involved benefit from it C) Price System is a mechanism that coordinates exchange efficiently: 1) Without need for central planning 2) Without need for all parties to communicate D) Price System provides coordination and economic efficiency through: E) Three Functions of Prices: 1) Communicates information about scarcity (fails in monopoly) 2) Provides incentives for efficiency (cost of production, benefit from use) 3) Distributes Income VI)Transmission of Information A) Example: Soy Production 1) Health benefits of soy – demand at stores (profit incentive to meet demand) 2) Demand at wholesale level – wholesale prices go up 3) Demand at production level 4) Substitution to increased production requires increase in price
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Microeconomics - 1/15 What is Economics Economics is the...

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