•By exploiting opportunities, you are destroying opportunities and thus creating equilibrium.•Markets usually reach equilibrium via changes in prices – which rise or fall until no opportunities for individuals to make themselves better off remain. •Equilibrium is extremely helpful in understanding economic interactions because it provides a way of cutting through the complex details of those interactions.oBecause of equilibrium, we can depend on markets to move in a predictable fashion. For example, we know that there will always be food at supermarkets. Because if there were no food distributors, there would be a big profit opportunity for a merchant to put their own product on the shelves. B. Efficiency – Producing with the least cost•Economy takes all opportunities to become better off without becoming worse offoEconomists do not consider an efficient economy an efficient use of money; rather an efficient economy results in the happiness of all.An efficient economy also produces the maximum gains from trade possible given the resources available. C. Markets are generally Efficient – The government can help when markets fail•However, the government doesn’t need to force efficiency because in most cases the invisible hand does the job. oThe incentives built into a market economy already ensure that resources are usually put to good use and that opportunities used to make people better off are not wasted. Economy Wide PrinciplesA.1 person’s spending = another’s incomeB.Sometimes overall spending can be out of line with economy’s capacity•Machines Idle•High Unemployment
•RecessionMacroeconomics•Governments/markets/recessions/booms/trade/currency value/consumers/inflation/deflation/unemployment Production Possibilities Frontier Assumptions –•Resources are limited•Only 2 products can be made and a trade-off must be made between them•Looking at the short term horizon1. In the example above Point A= 6 Guns and 0 Butter•All resources are used to produce guns: all land, labor, human capital, and physical capital2. Point E= 10 Butter and 0 Guns3. All Other Points= Trade-off between guns and butter; All resources are being used = Production Efficiency 4. Point H= Outside range of production; not possible currently, if obtain more resources (technology or quantity of resources). Represents economic growth in the future5. Point G:Inefficient; all resources are not utilized. Represents recession/depression Allocative Efficiency:Getting the mix right; only one point on the PPF is Allocative Examples –1.If at point a, what cost of producing one unit of butter?A B: (1 G 2 B)B: ½ of a gun opportunity cost2CD: Loose one gun, gain 2 butters, B = 1/2 of a gun***All costs the same throughout the whole possibility frontier, constant opportunity cost***Another PPF Example
E D: 1G = ½ BD C: 1G = 1 ½ BC B: 1 G = 3 BB A: 1 G = 5 B *** Increasing Opportunity CostsCosts of production increase as you go from 0 upwardsWhy? Not all resources are equally suited to making the products. For example, some resources produce butter better.