economics chapter 2

• Microeconomics

  • Reduction in the car industry leading to unemployment
• Decision makers in Microeconomics and Macroeconomics

  • Households (consumers, workers, savers), Firms, Government
• Workers aim for good working conditions and high pay
• Firms aim to make as much profit as possible
• Macroeconomics


  • Study of the whole economy
• Market economy is determined by consumer demand and the price mechanism
• Economic systems differ in their answers to the basic economic questions
• Economic systems

  • Planned economy
  • Market economy
• Allocation of resources


  Decision on how resources should be allocated
• Basic economic questions

  • What to produce?
  • How to produce it?
  • Who is to receive the products produced?
• Market economy rewards firms that produce what consumers want efficiently
• Market economy rewards firms that respond quickly to changes in demand
• In a market economy, land and capital are privately owned
• Microeconomics


  • Study of the behavior and decisions of households and firms
• The basic economic problem of unlimited wants leads to the need to allocate resources
• Changes in the microeconomy affect the macroeconomy

  and vice versa
• Manufacturing decisions


  Determining whether to use a large number of workers or capital resources
• Planned economy is characterized by state control over production, distribution, and pricing
• Macroeconomics

  • Government lowering income tax leading to increased car purchases
• Consumers aim for low prices and good quality products
• The government aims to have a strong economy
• Savers aim for reasonable interest on their savings
• Economic system


  Covers the institutions, organizations, and mechanisms in a country that influence economic behavior
• In a market economy, government intervention is minimal
• Market economy allows for resources to shift based on consumer demand
• Market economy allows for consumer choice and competition
• Market economy rewards firms that produce at low prices efficiently
• Firms which produce what consumers want to the lowest possible prices are rewarded with high profits
• Market failure occurs when market forces fail to produce the products that consumers demand, in the right quantities and at the lowest possible cost
• High incomes provide an incentive for people to work hard and for entrepreneurs to set up and expand firms
• Consumption and production of some goods may affect third parties, leading to external costs
• Market failure can lead to high prices due to lack of competition, lack of investment, reduction in expenditure on research and development, and slowdown in product improvement
• Workers and producers also need to be well-informed about job opportunities, product demand, and raw materials to lower production costs and ensure consumer satisfaction
• The profit motive and competition

  Increase efficiency
• Firms which do not change their output quickly to reflect what is in demand and have high costs are likely to go out of business
• If purely left to market forces, some products may be underproduced, some overproduced, and some not produced at all
• Consumers must be fully informed about products to achieve maximum satisfaction at the lowest prices
• Failure to take into account all costs and benefits can lead to overproduction based on private costs without considering external costs
• Disadvantages of a Market Economy

  • Consumers and private sector firms only take into consideration the costs and benefits for themselves and not the costs and benefits of their decisions on others
  • Competition between firms can lead to market control by one or a few firms, reducing choice for consumers and potentially leading to higher prices and lower quality products
  • Firms may not produce products that cannot be charged for, leading to the exclusion of certain necessary products for some individuals
  • Advertising can affect consumer choice and may lead to purchases that individuals would not have made otherwise
  • Some consumers may have a lack of income, leading to an unequal distribution of income and difficulties for certain groups such as the sick, disabled, elderly, and unemployed
  • Children of the rich may have better access to education and resources compared to children of the poor
• Markets supply private goods but not public goods, which must be financed through taxation