Mid-term 2

Efficiency

-The property of society getting the most it can from its scarce resources.
-The size of the economic pie

Equity

The property of disturbing economic prospertity fairly among the members of society
- How the economic pie is divided

Principle #1

People face tradeoffs

People face tradeoffs

- we usually have to give up one thing to get another.
- classic tradeoff between guns and butter.
- classic tradeoff between clean environment and a high level of income.
- conflict between effeciency and equity.
- When the government tries to cut the economic pie into more equal slices, the pie gets smaller.
-acknowledging life's tradeoffs is important b/c ppl r likely 2 make good decisions only if they understand the options that they have avaliable

Principle #2

The Cost of Something Is What You Give Up to Get It

The cost of something is what you give up to get it

- making decisions requires comparing the costs and benifits of alternative couses of action.
-Oportunity Cost.
- Decision makers should be aware of the opportuniy costs that accompany each possible action.

Opportunity Cost

Whatever must be given up to obtain some item.

Principle # 3

Rational People Think at the Margin

Rational People Think at the Margin

-Decisions in life are rarely balck and white, but usually involve shades of gray.
- marginal changes are changes around the edges of what you are doing.
- people make decisions by comparing marginal benefits and marginal costs.
- Marginal decision making can help explain some otherwise puzzling economic phenomena.
- The reason is that a person's willingness to pay for any good is based on the marginal benefit that an extra unit of the good will yield.
- The marginal benifit, in turn, depends on how many units a person already has.
- a rational decision maker takes an action if and only if the marginal benifit of the action exceeds the marginal cost.

Ratioal people

- people who systematically and purposfully do the best they can to achieve their objctives.

marginal changes

small incremental adjustments to a plan of action

Principle # 4

People Respond to Incentives

People Respond to Incentives

-because rational people make decision by comparing costs and benefits, they respond to incentives.
- incentives will play a specific role in the study of economics.
- incentives are crutial analyzing how markets work.
- The effect of a good's price on teh behavior of buyers and sellers in a market is crutial for understanding how the economy allocates scarce resources.
- when policymakers fail to consider how their policies affect incentives, they often end up with results they did not intend.
- when analyzing any policy, we must consider not only the direct effects but also the indirect effects that work throught incentives.
- If the policy changes incentives, it will cause people to alter their behavior.

Incentive

- something taht induces a person to act

Principle #5

Trade Can Make Everyone Better Off

Trade can make everyone better off

- Canada and US firms do produce many of the same goods.
- Trade between two countries can make each country better off.
- gains much from its ability to trade with others.
- trade allows each person to specialize in the activites he or she does best.
- By trading with others, people can buy a greater variety of goods and services at lower costs.

Principle # 6

Markets Are Usually a Good Way to Organize Economic Activity

Market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Markets are usually a good way to organize economic activity

- most countries have a market economy.
- Firms and households interact in the marketplace, where prices and self-interest guide their decisions.
- in a market economy no one is looking out for the economic well-being of society as a whole.
- Free markets contain many buyers and sellers of numerous goods and services, and all of them are interested primarily in their own well-being.
- market economies have proven remarkably successful in organizing economic activity in way that promotes overall economic well-being.
- "invisable hand"
- prices are the insturment with which the invisible hand directs economic activity.
- buys look @ price when determining demand.
- sellers look @ price when determining supply.
- the decisions that buyers and sellers make, market prices reflect both the value of a good to society and the cost to society of making the good.
- buyers and sellers reach outcomes maximize the welfare of society as a whole.
- when governments interfere with prices, such as t

Conclusion

- 5 principles

Summary

- the fundamental lessons about individual decision making are that people face tradeoffs among alternaive goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benifits, and that people change their behavior in response to the incentives they face.
- the fundamental lesson about interactions among the people are that trade can be mutually beneficial, that markets are usually a good way of coordinating trade among people, and that the government can potentially improve marke outcomes if there is some market failure or if the market outcome is inequitable.
- The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, taht money growth is the ultimate source of inflation, and that society faces a short-run tradeoff between inflation and unemployment.

Scarcity

the limited nature of socity's resources

economics

the study of how society manages its scarce resources

efficiency

the property of society getting the most it can from its scarce resources

equity

the property of disturbing economic prosperity fairly among the members of society

opportunity cost

whatever must be given up to obtain some item

rational people

peole who systematically and purposefully do the best they can to achieve their objectives

marginal changes

small incremental adjustments to a plan of action

incentive

something that induces a person to act

market economy

an economy that allocates resources throught the decentralized decisions of many firms and households as they interact in markets for goods and services

property rights

the ability of an individual to own and excercise control over scarce resources

market failure

a situation in which a market left on its own fails to allocate resources effieiency

externality

the impact of one person's actions on the well-being of a bystander

market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

productivity

the quantity of goods and services produced from each our of a worker's time

inflation

an increase in the overall level of prices in the economy

business cycle

fluctuations in economic activity, such as employment and production

Give 3 examples of important tradeoffs that you face in you life.

1. Time studying verses time working
2. money made verses money spent
3. time spent in class verses time spent working

What is the opportunity cost of seeing a movie?

-The money it costs to pay for the movie
- The money spent on snacks @ the movie
- The time spent to view the movie

Water is necessary for life. Is the marginal benefit of a glass of water large or small?

Small

Why should policymakers think about incentives?

b/c incentives modivate ppl to make decisions.

Why isn't trade among countries like a game, with some winners and some losers?

b/c every country benifits from trade

What does the "invisble hand" of the market place do?

it balances the price of supply and demand. pushes it up or down depending on supply and demand

Describe some of the tradeoffs faced by each of the following.
a. a family deciding whether to buy a new car.
b. a member of parliament deciding how much to spend on national parks.
c. a company president deciding whether to open a new factory.
d. a professor deciding how much to prepare for class

a. the money spent on the new car could have been used to send a child to college.
b. where else could the money be allocated, and how much of the money to be put on into the parks.
c. how much money will it cost to open the new factory. How much money the company will make from the new factory.
d. How much prepreratoin helps the students.

You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, forgone wages) are measured in dollars, but the benifits of the vacation are psychological. How can you compare the benefits to the costs?

money can me measured in times, by means of wages. and time can be psychological.

You are planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. What is the true cost of going skiing?
Now suppose taht you had been planning to spend the day sutying at the library. What is the cost of going skiiing in this case? Explain.

The true cost of skiing, is the amount of money you will have to pay, plus the time it takes you to go skiing, plus the wages you loose going skiing instead of working.
The cost of skiing instead of studying would be the time you loose studying, which in the long run may affect your grades and career choice.

You win $100.00 in a hockey pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5% interest. What is the opportunity cost of spending the $100.00 now?

If you put the money in the bank, in a few years you will have more money to spend in the future. If you do not spend the money you may not be able to get something you want.

The company that you manage has invested $5million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3million. If it would cost $1million to finish development and make the product, should you go ahead and do so?
What is the most that you should pay to complete the development?

Yes you should go ahead and finish the project.
The most you should pay is $3million.

The welfare system provides income for people who are very poor, with low incomes an few assets. If a recipient of welfare payments decides to work and earn some money, the amount he or she recieves in welfare payments is reduced.
a. How does the existance of the welfare system affect people's incentive to save money for future?
b. How does the reduction of welfare payments associated wiht higher earnings affect welfare recipients' incentive to work?

a. b/c ppl do not have a surplus of money to save they are not likely to save the money.
b. less money coming in from welfare will cause someone to find more work so they can make up the difference.

Your roommate is a better cook than you are, but you can clean more quickly than your roommate can. If your roommate did all of the cooking and you did all of the cleaning, would your chores take more or less time tahn if you divided each task evenly?
Give a similar example of how specialization and trade can make two countries both better off.

It would take less time.
The countries are just gonna be able to do thing more efficiently and then just trade rather than using more time and un easily accesable resources.