econ100 ch 1

• Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
• In analyzing markets, we generally assume:

  1.People are rational

  2.People respond to economic incentives

  3.Optimal decisions are made at the margin
• Economists generally assume that people are rational, using all available information to achieve their goals.
• Incentive: something that induces a person to act.
• Rational people respond to incentives such as rewards and forfeits.
• Economists use the word marginal to mean an extra or additional benefit or cost of a decision
• Comparing MC and MB is known as marginal analysis.
• In a world of scarcity, we have limited economic resources to satisfy our desires.

  Therefore we face trade-offs
• Trade-off: The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.
• three fundamental questions:

  1. What goods and services will be produced?

  2. How will the goods and services be produced?

  3. Who will receive the goods and services produced?
• The opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity
• who receives the goods and services produced depends largely on how income is distributed.
• Changes in tax and welfare policies change the distribution of income, though people often disagree about the extent to which this “redistribution” is desirable.
• Centrally planned economy: An economy in which the government decides how economic resources will be allocated.
• Market economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources
• Mixed economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
• In a market economy, the income of an individual is determined by the payments received for what they have to sell.
• Each of these households and firmsacts as if “led by an invisible hand”to promote general economic well-being.
• The invisible hand works through the price system:§The interaction of buyers and sellers determines prices. 
• Productive efficiency occurs when a good or service is produced using the least amount of resources.
• Allocative efficiency occurs when production reflects consumer preferences and resources are allocated throughout the economy to produce what consumers demand.
• Dynamic efficiency occurs when new technologies and innovation are adopted over time.
• Markets tend to be efficient because they promote competition and facilitate voluntary exchange.
• Voluntary exchange refers to the situation in which both the buyer and seller of a good or service are made better off by the transaction
• Equity usually involves a ‘fair’ distribution of economic benefits.
• economic models are simplified versions of reality used to analyse real-world economic situations.
• One purpose of economic models is to make economic ideas sufficiently explicit and concrete to be used for decision making by individuals, firms or the government
• Building an economic model often follows these steps:

  1.Decide on the assumptions to use

  2.Formulate a testable hypothesis.

  3.Use economic data to test the hypothesis.

  4.Revise the model if it fails to explain the economic data well.

  5.Retain the revised model to help answer similar economic questions in the future.
• A hypothesis in an economic model is a statement that may be either correct or incorrect about an economic variable
• An economic variable is something measurable that can have different values, such as the wages paid to IT workers.
• Important features of economic models:

  • Assumptions and simplification
  • Testing
  • Economic variables
• Most economic hypotheses are about causal relationships.
• To test a hypothesis, we must analyse statistics on the relevant economic variables.
• Economics is a social science because it applies the scientific method to the study of individuals and societies.
• Microeconomics is the study of

  •how households and firms make choices,

  •how they interact in markets, and

  •how the government attempts to influence their choices.
• Macroeconomics is the study of the economy as a whole,
• Technology: the processes a firm uses to produce goods and services

  • Capital: manufactured goods that are used to produce other goods and services