C prices guide self interested households and firms

Info icon This preview shows pages 3–5. Sign up to view the full content.

View Full Document Right Arrow Icon
c) Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well being. 7. Governments can Sometimes Improve Market Outcomes - Important role for govt: Enforce property rights (with police, courts etc) - People are less inclined to work, produce, invest or purchase if large risks of their property being stolen. - Market Failure: When the market fails to allocate society’s resources efficiently. - Cause of Market Failure: a) Externalities: When the production or consumption of a good affects bystanders (e.g. pollution) b) Market Power: A single buyer or seller has substantial influence on market price (e.g. monopoly) *In such cases, public policy may promote efficiency. - Govt. may alter market outcome to promote equity. - If the market’s distribution of economic well being is not desirable, tax or welfare policies can change how the economic “pie” is divided. ECONOMISTS AS A SCIENTIST - Economist play two roles 1. Scientists: Try to explain the world 2. Policy advisors: Try to improve it - As scientists economists employ the scientific method : the dispassionate development and testing of theories about how the world works. ASSUMPTIONS AND MODELS - Assumptions simplify the complex world, make it easier to understand. Example: To study international trade, assume two countries and two goods. - Assumptions are unrealistic but they are simple to use and they give us useful insights about the real world. - Model: A highly simplified representation of a more complicated reality. Economists use models to study economic issues.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1. Our First Model: The Production Possibilities Frontier - The Production Possibilities Frontier: A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology. Example One: a) We have two goods, computers and wheat. b) One resource= labor (measured in hours) c) The economy has 50,000 labor hours per month available for production. d) Producing one computer requires 100 hours of labor e) Producing one ton of wheat requires 10 hours of labor Line= PPF (it is the boundary of what we can do) -By definition there can be no points outside of the PPF. -Points interior to the PPF are attainable, but if the point is within the interior of the PPF, then the economy is being inefficient and not using their resources to the best of their abilities. If production is on the PPF line then the economy is producing efficiently. - Q: On the graph, find the point that represents (100 computers, 3000 tons of wheat), label it F. Would it be possible for the economy to produce this combination of the two goods? A: It would be possible for the economy to produce this combination of the goods, but the point F would be on the interior of the PPF, which shows that it is feasible but wasteful (inefficient).
Image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern