1.1 Learning Objective: Explain these three key economic ideas: People are ratio
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1.1 Learning Objective: Explain these three key economic ideas: People are rational, people respond to incentives, and optimal decisions are made at the margin. 2.2 Centrally planned economies have been less efficient than market economies. a. Has this difference in efficiency happened by chance, or is there some underlying reason? b. If market economies are more economically efficient than centrally planned economies, would there ever be a reason to prefer having a centrally planned economy rather than a market economy? 3.3The Making the Connection explains that there are both positive and normative elements to the debate over raising the minimum wage. What economic statistics would be most useful in evaluating the positive elements of the debate? Assuming that these statistics are available or could be gathered, are they likely to resolve the normative issues in this debate? 4.1 Briefly explain whether each of the following is primarily a microeconomic issue or a macroeconomic issue. a. The effect of higher cigarette taxes on the quantity of cigarettes sold b. The effect of higher income taxes on the total amount of consumer spending c. The reasons for the economies of East Asian countries growing faster than the economies of sub-Saharan African countries d. The reasons for low rates of profit in the airline industryExplanation / Answer
Introduction to Economics Chapter 1 (Micro) Limits, Alternatives, and Choices Learning Objectives: n Core economic terminology n Definition of economics n Microeconomics vs. macroeconomics n Scarcity and Choice n Economic Perspective n The economizing problem: n The Budget Line n The Production Possibilities Model Core Economic Terminology: n Utility: Pleasure, satisfaction n Opportunity Costs: What you give up from one alternative to get something else from another alternative n Resources: Productive means, factors of production, inputs. n Allocation of Resources: Uses of the resources in the production of goods and services Economics is … the social science concerned with how individuals, institutions and society make optimal choices under conditions of scarcity. Two Branches of Economics n Economics is divided into two levels of analysis: The Core Economic Problem… n is scarcity n Scarcity is the outcome of two facts… Scarcity… is our inability to satisfy all our wants We must make choices Our choices depend on the incentives we face The Economic Perspective… Refers to three important ideas of how people make their choices: Economists assume that: n People make rational choices n Make optimal decisions at the margin n People respond to incentives Rational Choices (Purposeful Behavior) n Economists assume that people make rational decisions n Use all the information available as they act to achieve their goals n Seek their own self-interest n Maximize their utility n Compare costs and benefits of their choices Optimal Decisions are Made at the Margin n Marginal means “extra,” “additional,” or “a change in.” n People compare the marginal cost and marginal benefit of one additional unit of the good or a small adjustment to an existent plan of action. Marginal Cost Every choice involves a cost. n The cost of an action is the opportunity cost of that particular action n The value of what must be given up to get it. n The highest-valued alternative forgone n A “sunk cost” is a cost that occurred in the past and it is not recoverable. n It is irrelevant for our decision Marginal Benefit n The benefit of an activity is the gain or pleasure that it brings. n Economists measure the benefit of something by what a person is willing to give up. n Blue book value is $6500 if transmission works, $5700 if it doesn’t n What is your decision? Should you have the transmission repaired? Optimal Decision n Decision to change a course of action or choose one good over another occurs when n An optimal decision is to continue any activity up to the point where People Respond to Incentives n Incentives influence our behavior and choices n People respond in predictable ways to changes in marginal costs and marginal benefits of their actions Ø When the cost of doing something increases è people tend to avoid that activity Ø When the benefits from something increases è people tend to seek that activity The Individuals’ Economizing Problem n Individuals face scarcity (unlimited wants and limited income) n Income refers to the payments individuals receive for the services of the resources they own. n Labor è wages n Land è rent n Capital è interest n Entrepreneurship è profits The Budget Line (Constraint) n …shows the various combinations of two products a consumer can purchase with a specific money income. n Assumptions: n A fixed money income n Two goods n Fixed market prices of the goods Individual’s Budget Line Economic Concepts Illustrated by the Budget Line n Scarcity n Choice n Tradeoffs n Opportunity Cost A Line Graph and the Slope Revisited n A line is a continuous sets of (X,Y) values on a two-dimensional graph n The slope of a line is constant Opportunity Costs n The slope of the budget line expressed in terms of the other good (good measured on Y-axis) is the opportunity cost of the good measured on the X-axis n What is the opportunity cost of one DVD? n What is the opportunity cost of one book? The Budget Line and Changes in Income n Location of the budget line changes with money income. n An increase in money income expands the budget line. It shifts to the right. n A decrease in money income shrinks the budget line. It shift to the left. Society’s Economizing Problem n Society must also make choices under conditions of scarcity. n It faces unlimited wants (better education, criminal system, health care) and limited resources. Resources … n are means of production; they are also called factors of production or inputs. n Four basic resource categories: n Land (natural resources) n Capital (manufactured resources) n Labor (human resource) n Entrepreneurial Ability (human resource) Capital and Investment n Money, stocks and bonds are not capital. They are financial capital; they are used to finance the purchase of capital goods. n Investment is the production or purchase of new capital goods.
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