Scribd
Upload
4 views7 pages

Econ 100

The document outlines fundamental concepts of economics, focusing on the allocation of scarce resources and the principles that govern economic decision-making. It introduces ten key principles, emphasizing trade-offs, opportunity costs, and rational behavior, while also distinguishing between microeconomics and macroeconomics. Additionally, it discusses market structures such as perfect competition, monopoly, and oligopoly, along with the roles of supply and demand in determining market dynamics.

Uploaded by

blue
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
4 views7 pages

Econ 100

The document outlines fundamental concepts of economics, focusing on the allocation of scarce resources and the principles that govern economic decision-making. It introduces ten key principles, emphasizing trade-offs, opportunity costs, and rational behavior, while also distinguishing between microeconomics and macroeconomics. Additionally, it discusses market structures such as perfect competition, monopoly, and oligopoly, along with the roles of supply and demand in determining market dynamics.

Uploaded by

blue
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 7

Econ 100

Economics is about the allocation of scarce resources. (limited resources,


unlimited wants) ex: water and land

Scarcity: the limited nature of society’s resources.


Economics: the study of how society manages its scarce resources (kıt kaynak).
– : how people decide what to buy, how much to work, save, and
spend
– how firms decide how much to produce, how many workers to hire
– how society decides how to divide its resources between national
defense, consumer goods, protecting the environment, and other
needs

10 Principles of Economics

Our Primary focus will be on these three principles:


1. People face trade-offs;
2. The cost of something is what you give up to get it;
3. Rational people think at the margin;

THEN

4. People respond to incentives;


5. Trade can make everyone better off;
6. Markets are usually a good way to organize economic activity;
7. Governments can sometimes improve market outcomes;

Then…

8. A country's standard of living depends on its ability to produce


goods and services;
9. Prices rise when the government prints too much money;
10. Society faces a short-run tradeoff between inflation and
unemployment.
Principle #1: Trade-off Principle

When there is scarcity, then having more of one good thing means necessarily
having less of another. (trade off is “a situation in which you must choose
between or balance two things that are opposite or cannot be had at the same
time”)

• Efficiency: when society gets the most from its scarce resources
• Equality: when prosperity is distributed uniformly among society’s
members

Principle #2: Opportunity Cost

• It is the relevant cost for decision making.


• Examples:
The opportunity cost of…
• …going to college for a year is not just the tuition, books, and fees, but
also the foregone wages.
• …seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater.

The value of the next-best alternative that must be forgone (given up) in order to
undertake an activity.

Principle #3: Rationality

Rational people
– systematically and purposefully do the best they can to achieve
their objectives (utility maximizers);
– make decisions by evaluating costs and benefits of marginal
changes, incremental adjustments to an existing plan.;
– Benefit versus Cost.

Principle #4: Benefit vs. Cost

Do activity (or take action) x if and only if B(x) ≥ C(x),


B(x) is the benefit of activity x (to the individual)
C(x) is the cost of activity (to the individual)
People are rational: they do activity x if and only if B(x) ≥ C(x)
B(x) is the benefit of activity x (to the individual)
C(x) is the cost of activity (to the individual)

We will introduce the 4th principle: People respond to incentives


(teşvik).

• Incentive: something that induces a person to act (or motivates effort),


i.e. the prospect of a reward or punishment.
• Rational people respond to incentives.

Ariel Rubinstein is one of the most important and creative economic theorists of
our day.

Brownian motion is mathematical model (process) used to model randomness.

Optimal level of activity is where marginal benefit (MB) equals marginal cost
(MC)

• Benefit-cost principle
The level of an activity should be increased if, and only if, the marginal benefit
exceeds the marginal cost.
Economists play two roles:
1. Scientists: try to explain the world
2. Policy advisors: try to improve it

In the first, economists employ the scientific method,


the dispassionate development and testing of theories about how the world
works.

Our First Model:


The Circular-Flow Diagram

The Circular-Flow Diagram: a visual model of the economy, shows how


dollars flow through markets among households and firms

• Two types of “actors”:


– Households;
– Firms.
• Two markets:
– The market for goods and services;
– The market for “factors of production”.

Factors of production: the resources the economy uses to produce goods &
services, including
– Labor;
– Land;
– Capital (buildings & machines used in production).

Our Second Model:


The Production Possibilities Frontier

• The Production Possibilities Frontier (PPF):


a graph that shows the combinations of
two goods the economy can possibly produce given the available
resources and the available technology
• Example:
– Two goods: computers and wheat
– One resource: labor (measured in hours)
– Economy has 50,000 labor hours per month available for
production.

Microeconomics and Macroeconomics

Microeconomics is the study of how households and firms make decisions and
how they interact in markets.

Macroeconomics is the study of economy-wide phenomena, including


inflation, unemployment, and economic growth.

positive statements: attempt to describe the world as it is.

normative statements: attempt to prescribe how the world should be.

Positive statements can be confirmed or refuted,


normative statements cannot;

Principle #5: Gains from Trade.

To explain, we going to use a model. This model was first studied by David
Ricardo (comparative advantage) in his book “Principles of Political Economy
and Taxation”, in 1817.

David Ricardo was one of the most influential of the classical economists, along
with Adam Smith.

Why specialize and trade?


Goal: Each country/person will have more sandwiches to eat!
With specialization, the total production of the two individuals can be (will be)
more than 18 sandwiches.
Big idea (David Ricardo)
“Gains from trade” are created when individuals specialize in the activity in
which they have a COMPARATIVE ADVANTAGE (karşılaştırmalı üstünlük).

So, the implication is for any technology one can imagine, there will always be
gains from trade!

This is David Ricardo’s contribution!


“He was often credited with systematizing economics…”

Exports: goods produced domestically and sold abroad

To export means to sell domestically produced goods abroad.

Imports: goods produced abroad and sold domestically

To import means to purchase goods produced in other countries.

Chapter#4
SUPPLY AND DEMAND: HOW MARKETS WORK
is the most basic of the models economists use to explain everything (almost!).

A market is a group of buyers and sellers of a particular good or service.

• Buyers determine demand.


• Sellers determine supply.

In a perfectly competitive market :

There are many buyers and many sellers, so that each individual buyer or
individual seller has no effect on price.

Sellers and buyers are “price takers”.


All firms produce goods that are the same.

Perfect Competition

Examples: Produce (farmers’ market), supermarkets, knockoffs, technology,


websites.

Monopoly

One seller, no competition


Examples: Public utility (gas, electric, water), Cable tv, local phone companies.

Oligopoly

– Few sellers (few large firms dominate the market)


– Not always aggressive competition
– Examples: Airline industry, telecom industry, mass media,
pharmaceuticals, auto industry, oil, soft drinks.

Monopolistic Competition

– Many (small) sellers


– Slightly differentiated products
– Examples: Clothing & Apparel, sportswear, restaurants,
hairdressers.

Quantity demanded is the quantity of a good that consumers are willing and can
afford to buy.

Demand is the relationship between quantity demanded and its determinants,


one of which is the price of the good.

You might also like