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Econ Chapter1

The fundamentals of Economics

Rachel Yoo

on 27 April 2010

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Transcript of Econ Chapter1

Chapter 1 The Fundamentals of Economic What is Economic?
Is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Rachel Yoo What is scarce resources? It is related to SCARCITY!! Scarcity is one in which goods are limited relative to desires. At this point, when wants are unlimited, it is important that an economy make the best use of its limited resources. "EFFICIENCY" In economics, we say that an economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off. There are 2 types of economics:
Microeconomics: Macroeconomics: Markets-firm

Households Concerned with overall performance of the economy. 3 fundamental questions of economic organization What? How? For whom? Which good will be produced and in what quantities? How will each good be produced?
(eg. labour-intensive or capital-intensive technology?) For whom are goods produced?
How will income be distributed? Normative and Positive Economic statements:
What are the differences? & N: They are value judgements, opinions, statements that cannot be falsified, or proven right or wrong. P: Statements that can be falsified, or proven, at least in principle, right or wrong. This can be tested against facts. 3 Types of "Economies" Market economy:
Is an economy where households and firms each acting in their own self-interest determine answers to the three questions above through their interaction in markets Command economy:
Is one where the state provides the answers.
Government makes all important decisions about production and distribution. Mixed economy:
with elements of market and command.
both markets and the state are responsible for the answers.
Input, are commodities or services that are used to produce goods and services.
Output, are various useful goods or services that result from the production process and are either consumed or employed in further production. Input and Output Factors of production Land: natural resources Labour: human resources Capital: factory, machine, equipment, etc Entrepreneurship: risks, make judgements PPF: Production Possibility Frontier The PPF shows the maximum amounts of production that can be obtained by an economy, given its technological knowledge and quantity of input available. The PPf represents the menu of goods and services available to society Point U shows inefficiency in allocating resources. unattainable Economy's resources are being used as effective as possible to satisfy people's meeds and desires. productive efficiency occurs when an economy cannot produce more of one good without producing less of another good; this implies that the economy is on its PPF. AND here, when economy producing less of another good with producing more of one good. This is opportunity cost. Opportunity cost is "another good". "Opportunity cost of a decision is the value of the good or service forgone."
Value of the next best alternative sacrificed Actual growth:
this refers to an increase in the amounts increase in total output. It is illustrated with a movement from a point inside the PPF to another point towards the northeast with more of at least one good. Potential growth:
the term refers to the rate at which a country's economy could grow if all its resources were fully employed. It is illustratd with an outward shift of the PPF. THANK YOU♥ Hahahaha I want "A"
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