First Exam Coverage Introduction The study of how societies use scarce resources to produce valuable goods and

distribute these among different individuals Goods that are scarce or limited in supply The reality of having limited goods to unlimited wants This describes the most effective use of a societys resources to satisfy peoples needs and wants. An economy is working efficiently when the output in one field cannot be increased without decreasing the output in another field. The branch of economics that studies individual entities such as markets, firms, households, and individuals. The branch of economics concerned with the overall performance of the economy. It particularly focuses on: national income, unemployment, inflation, business cycle, exchange rate, and interest rates [NiUIBcErIr]. Economists use a scientific method that makes simplifying assumptions, generates predictions, and tests these predictions through economic data. Post Hoc (A then B is not A caused B), Ceteris Paribus (holding other things constant), Fallacy of Composition (behaviour of individual is not always equal to the behaviour of the aggregate) The goal of economics is to organize society such that resources are efficiently used up. The goals of macroeconomics include (1) explaining economic growth and collapse to improve standards of living and (2) understanding the business cycle to stabilize economic conditions. What goods will be produced and how much? How will these goods be produced? For whom: how will these goods be distributed to people? A command economy answers the above questions through a centralized body of decision-makers (i.e. the government). A market economy answers the above questions through the interaction of markets through buyers and sellers; individuals and firms. A mixed economy contains elements of a command and a market economy. Positive economics deals with statement of fact or observation. These statements may be debatable, but as long as they are only observation, they are still positive. For instance, Unemployment tends to discourage the expenditure of disposable income. Normative economics deals with value judgments (i.e. judgments made in comparing the value of certain decisions). For instance, The budget for education should be increased as investment to important capital.

Definition of Economics Economic Goods Scarcity Efficiency

Microeconomics Macroeconomics

Methods of Economists Fallacies

Goal of Economics Goals of Macroeconomics Three Problems of Economic Organization Alternative Economic Systems

Two Kinds of Economic Questions

Production Possibility Frontier Tradeoffs Opportunity Cost

Productive Efficiency Inefficiency

Animal Spirits

Effects on the PPF

What is a Market?

Market Dynamics: Equilibrium

The Markets Answers to WHAT, HOW, FOR WHOM

Market Model The PPF graphs the maximum combination of goods that an economy can efficiently produce given a set amount of resources (i.e. factors of production) and technology. At the frontieror along the PPFyou cannot increase the output of one good without decreasing the output of another good. The value of the alternative forgone. In the PPF of guns and butter, the opportunity cost of guns is the amount of BUTTER forgone for an n increase in guns output. The efficiency at which output is at its maximum (represented by the PPF) Inefficiency is caused by unemployed resources which push an economy inside its PPF. Inside the PPF, one can increase the output of one good WHILE also increasing the output of the other. Animal spirits refer to a general action-taking demeanour in the economy that energizes people to invest, compete, and maximize their productive efficiency. Inefficiency could be due to a lack in animal spirits. Economic Growth: Pushes the PPF outward Public Goods VS Private Goods: When more public goods are created, the PPF is pushed further outward. Current Consumption VS Future Consumption: When current consumption is sacrificed for future consumption, the economy grows faster. Pollution: Inefficiencies such as this externality strangle the economy within its PPF. A market is a mechanism between buyers and sellers through which buyers communicate what goods they want through price signals, sellers determine how they make goods through competition, and buyers and sellers coordinate the distribution of these goods depending on wages, income, rent, etc. The equilibrium is the point at which supply is equal to demand, goods made are exactly the number of goods desired. At equilibrium, there is no tendency to move. If a market is not in equilibrium, it will always tend to move towards it. WHAT: [PESO VOTE X PROFIT]. The goods that are produced are determined by, basically, what consumers want. Each good sold is a peso vote to say that consumers desire that good. The more votes a good gets, the more profitable it likely is. The more profitable that good, the more firms will be encouraged to produce it. HOW: [EFFICIENTLY]. Since millions of firms operate under the market producing a variety of goods, competition between these firms encourage them to find and use the most efficient method of production to garner the most profit. FOR WHOM: [PRICE AND QUANTITY OF FACTOR GOODS]. There are two kinds of markets in the economy (to be elaborated below): (1) the market where producers (i.e. firms) sell their goods and (2) the market where consumers sell the factors of production (land, labor, capital) that they own. The profits earned in the factors market through rent, wage, or income determine who can afford what goods.

Two Types of Markets

Invisible Hand

Efficiency: Alternative Definition

Class Example: Auction

The products market is where produced goods are bought and sold. The factors of production market is where land, labor, and capital (i.e. durable goods used to produce other goods) owned by consumers are sold to producers for them to produce finished goods. In a market economy, Adam Smith postulates that when individuals and firms look after their own interest, an invisible hand prods them to accomplish what is actually best for all concerned. At this competitive efficiency, the economy would be on its PPFmost desired combination of goods produced, most efficient methods, least possible amount of inputs. Efficiency occurs when there are no goods wasted throughout the market economy. What consumers want is exactly what producers produce. What producers need are exactly what consumers sell. All gains from trade are exhausted: what producers earn, they use to buy FOPs, while what consumers earn from FOPs, they use to buy the producers goods. The auction in class sought to display how the demand for one item drives up the price such that only one person in the end would get that one item. As the price went higher, it reached an equilibrium point where finally, what was desired was exactly what was being offered.

Characteristics of a Modern Economy

Capital

Evolution of Capitalism

Economic Role of Government

Issues of Efficiency

Markets and the State Trade: Due to the division of labour, people were able to specialize. Due to specialization, an individual was able to focus on creating or participating only in a portion of the production process. But he or she does it so well that the output is far better than when he creates one unit of the entire output on his own. Trade enables these individual performers to trade outputs such that his excellently-produced good X can be exchanged for an excellently-produced good Y. Money: To avoid a double coincidence of wants that is reliant solely on trade, money is used as the medium of exchange in the economy. It is easy-to-use, easy-to-carry, and universal. Capital: These are durable goods used to produce other goods. In our modern economy, capital enables us to improve and grow our output. Today, we have the right to (1) own, (2) charge for, and (3) sell capital. Our current capitalist economy is reliant on how individuals and firms make a profit from the capital that they own. For instance, the past decades have accelerated improvement in computers so much so that the capital of these computers have accelerated progress in other areas of productionas well as the profit of those who own these computers. Feudalism: A command economy ruled in the form of kingships or lordships. Competitive Capitalism: The 19th century Western nations ventured so far into a market-capitalist economy that pollution and inequity deliberately proliferated. Welfare State: Seeing the market failures caused by a strong laissez-faire policy, governments started to step in to assume economic roles for the benefit of the entire society. Shifts: Currently, a tug-of-war continues to occur between market and command forces as governments choose to alternatively step in more or tiptoe out of the affairs of the market. Efficiency: Although an economy will operate under perfect competition, the market can still be driven to commit inefficiencies through externalities such as pollution. Additionally, any market failurea situation in which the market fails to be efficient and perfectly competitiveneeds a controlling body (i.e. the government) to curb these inefficiencies. Moreover, public goods are goods that firms will not be encouraged to produce but are nevertheless essential to the public. The government performs a big role to deliver more efficiency in the economy. Equity: Under perfect competition, an economy will not care to whom goods will go to as long as these people have income enough to cast the flow of money back to firms or producers. A government is necessary to make sure that the poor will not go hungry, that the unemployed will have enough money to go by. Macroeconomic Growth and Stability: The fundamental macroeconomic objective of an economy is to promote growth in the long-term (e.g. through output) and in the short-term by damping the effects of business cycle spikes. Imperfect Competition: Perfect competition occurs when no one producer or consumer is powerful enough to change the price level of a good. The converse

is true in imperfect competition. Monopolies, oligopolies, and cartels presiding over markets significantly affect the price level in an economy. Solution: To prevent imperfect competition, the government can establish anti-trust laws. Externalities: Externalities are costs or benefits created by an entity that is not accounted for. These externalities have an effect particularly on those outside the market (i.e. bystanders). Negative externalities include aerial and aquatic pollution caused by manufacturing, or even the noise created by concerts. When unaccounted for, negative externalities are overproduced. Positive externalities include trees planted by a firm within a community. When unaccounted for, positive externalities are underproduced. Solution: The government must institute policies that make firms accountable for externalitiesparticularly the negative ones. Public Goods: Public goods are goods that (1) is still consumable for others after the consumption by one and (2) is not disruptive: the consumption by one does not hinder the consumption of others. Examples include noncongested highways, sunlight, air, etc. Solution: The government must produce public goods. Because the market only concerns itself with efficiency, several households will fail to get what they need. Some may have most, while some may have so little. Solution: It will be the governments role to promote equity through progressive taxation and cash transfer programs to redistribute the wealth. Short-term Macro Concerns: The Business Cycle. Across recessions, depressions, and spikes, the government needs to smoothen out each stage of the business cycle to stabilize prices. Unstable or accelerating prices are sources of confusion and thus market wastage. Solution: The government may use (1) fiscal policies to tax the public and spend the budget and (2) monetary policies to control the supply of money and interest rates. Long Term Macro Concerns: Growth and Stability. Every economy aims to achieve a consistent positive growth. Solution: Slow economic growth can be remedied by an investment on capital, education, etc. The market achieves equilibrium when, at some price, the quantity demanded is exactly equal to the quantity supplied. Definition: The demand curve (DC) shows how much of a good is demanded at a certain price. It is downward sloping because as prices rise, consumers tend to demand less of a good. Income Effect: Consumers will demand less because, when the price of a good rises, a consumer will have less income remaining than the income remainder

Issue on Equity

Issues on Macro Growth and Stability

Market Equilibrium Demand Curve

Factors Affecting Demand Curve

Market Demand

Supply Curve

Factors Affecting Supply Curve

Shifts Along Curves Movements Along Curves

before the price rise. Thus, he will tend to buy less of it. Substitution Effect: When the price of a good rises, a consumer will tend to substitute it with a cheaper alternative. Average Income: The higher the income, the more of a good a consumer will demand. Population: The greater the population in an area, the larger the collective demand will be. Related Goods: When the price of a complement good rises, the demand for our good decreases. When the price of a substitute good rises, the demand for our good increases. Tastes: Trends, status symbols Special Influences: Environmental factors, the government The market demand is the quantities demanded of all goods added together at each price. This is the generalization we study in our lessons (i.e. we do not study the demand of Obama, Justin Bieber, or the one of mine or yours). Definition: The supply curve shows us the quantity producers are willing to produce at each price. It is upward-sloping. Law of Diminishing Marginal Returns: The supply curve is upward-sloping because as the next good is produced, more resources will always have to be employed. Thus, the next good will always have to be more expensive. Factors of Production/Inputs: As the prices of inputs rise, the price of our good will also have to rise. Technology: Better technology means cheaper goods. Related Goods: A rise in supply of goods made from the same processes and materials as our good will mean that there will also be a supply rise for our good. Government Regulations: Government policies can encourage or discourage accumulation of supply (i.e. tariffs, environmental policies). Special Influences: Environmental disasters Shifts along curves would mean a change in the factors affecting these curves. The correspondence of price and quantity would change completely. Movements along curves would mean a change in price. When the price of a good rises, a certain quantity is demanded or supplied.