Unit I Notes - Cobb Learning

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Transcript Unit I Notes - Cobb Learning

AP Micro/Macroeconomics Unit I
Basic Economic Concepts
The Economic Way of Thinking
AP Microeconomics Unit I – Basic Economic Concepts
What does the saying “There’s no such thing as
a free lunch” mean?
Objectives
• Define opportunity cost
• Define economic way of thinking
• Apply scarcity concepts to variety of economic and noneconomic
situations.
Introduction
• A.P. Economics has thousand of details that can sometimes be
confusing.
• This lesson will acquaints you with some basic economic concepts
and methodology.
What is Economics?
• Comes from Greek words oikos (“house”) and nomos (“custom” or
“law”), thus “rules of the house”
• What are we managing?
• Unlimited wants and needs
• How do we know they’re unlimited?
What is Economics?
• Society and Scarce Resources
• We use resources to meet wants and needs, but resources are limited
• Factors of production: land, labor, capital, entrepreneurship/ideas
• Scarcity – society has limited resources, cannot produce all the goods and
services people wish to have
• Economics is the study of scarcity
• How does society allocate scarce resources to meet unlimited wants and needs?
The Economic Way of Thinking
• Everything has a cost.
• “there is no such thing as a free lunch”
• every action costs someone time, effort or lost opportunities to do
something else.
Opportunity cost is the real cost of an item, including what must be given up to obtain it
people incur costs when making decisions, even when people appear to pay nothing.
• People choose for good reasons.
 People always face choices, however, if people have different values, they may make
different choices.
 Most of AP Economics concerns business and government decision making. (Remember,
these decisions are made by people.)
 Normative economics “makes prescriptive statements about how the
economy should work” (Krugman G-7)
 Positive economics “describes the way the economy actually
works” (Krugman G-7)
• Incentives matter.
 Many believe economics is all about
incentives.
 Supply and demand is about incentives
 Theory of the firm and factor markets are
about incentives.
 Government decision making is about
incentives
 Incentives change, people’s behavior
changes in predictable ways.
• People create economic systems to
influence choices and incentives.
 Cooperation among people is governed by
rules that are the core
written and unwritten
of an economic system.
 As rules change, incentives and behavior change.
 The success of market systems and the
rooted in incentives.
failure of communism are
• People gain from voluntary trade.
• People will trade when they believe the trade
makes them better off.
• Always remember throughout this course that
it is people, not countries, that trade and make
decisions.
• Economics is all about trade.
• Economic thinking is marginal thinking.
• Marginal choices involve the effects of additions
and subtractions from current conditions.
• A great deal of this course is about marginal
costs and benefits and will be discussed in every
unit.
• The value of a good or service is affected by people’s
choices.
o Goods and services do not have intrinsic value; their
value is determine by the preferences of buyers and
sellers.
o Intrinsic Value is the “value of a company or an asset based on an
underlying perception of the value.” (“Intrinsic Value”)
o Because of this, trading moves goods and services to
higher-valued uses. This is why trading is so important.
o The price of a good or service is set by supply and
demand.
• Economic actions create secondary effects.
• Good economics involves analyzing
secondary effects.
• Example: rent controls make apartments
more affordable to some consumers.
• Controls also make it less profitable to build
and maintain apartments.
• The secondary effect is a shortage of
apartments and houses for rent.
• The test of a theory is its ability to predict
correctly.
 You will discuss many theories in AP
Economics – all of these theories have
simplifying assumptions
 If the theory correctly predicts the
consequences of actions, it is a good
theory.
 Nothing is “good in theory but bad in
practice.”
Do Activity 1 – Do You Think Like an Economist?
1.
Because it is desirable, sunshine is scarce.
T F
Sunshine isn’t scarce because it isn’t limited;
it is a free good.
2. Because it is limited, polio is scarce.
T
F
Polio isn’t scarce because it isn’t desirable.
3.
Because water covers three-fourths of the earth surface and is
renewable, it cannot be considered scarce. T F
Scarcity is a relative, not an absolute, concept.
Because resources are scarce and wants are
unlimited, almost everything to scarce. If you pay an
opportunity cost to use a good or service, it is scarce.
If you pay a positive price for a good or service, it is
scarce. Water may cover three-fourths of the earth
but we pay an opportunity cost and a positive price
for clean water everywhere. Of course, water may
be scarce in the desert than in the wetlands. Only a
government can actually make water cheaper in a
desert.
4.
The main cost of going to college is tuition, room, and board.
T F
An important opportunity cost of going to
college is lost earnings. If you could earn
$20,000 a year by working, you will sacrifice
$80,000 during four years of college.
5.
If mass transportation fares are raised, almost everyone will
take the trains anyway. T F
It is false because, if all other things are
equal, less mass transportation will be
purchased if the price is higher. The price
could be increased in terms of dollars,
inconvenient schedules, crime and filthy cars.
The demand curve for transportation would
have to be perfectly inelastic, or vertical, for
the answer to this question to be True. (We
will discuss this issue later in a few weeks.)
6.
You get what you pay for. T F
The price of something depends on supply
and demand, not on usefulness or on some
criterion of quality. Water is more useful than
diamonds, but it has a lower price. What you
pay for a good or service depends on the
market price determined by supply and
demand.
Both Q-5 & Q-6 deal with the law of supply and demand. People
tend to buy more of something when the price is lower and
less when the price is higher.
Price includes money as well as such things as time,
aggravation, inconvenience and moral guilt. Sellers will try to
sell more of something if the price is higher and less of it if
the price is lower. This conflict resolved through the market.
7.
If someone makes an economic gain, someone else loses.
F
8.
If one nation produces everything better than another nation,
there is no economic reason for these two nations to trade.
T
F
T
Both Q-7 and Q-8 concern gains from trade. When people trade
voluntarily, both parties expect to gain, or they wouldn’t trade.
One reason for this gain is the law of comparative advantage if one
person does legal work better than another and if a second
person word-processes documents better than the first, they
would gain by trade.
But would a lawyer who is the fastest word processor in town
hire a secretary? Yes, because of comparative advantage: Each
person would specialize in what he or she does comparatively
better.
An hour spent word processing would is an hour not spent in
legal work, and the opportunity cost for the lawyer would be very
high. The lawyer will specialize in legal work and the secretary in
word processing. The total output of goods and services will
increase. This concept can also be applied to countries.
9.
A nonregulated monopoly tends to charge the highest possible
price.
T F
A monopoly charges a higher price than a
competitive market price, but the monopolist
cannot repeal the law of demand. If the price
is too high, the monopolist might sell nothing.
A monopolist will try to establish a price at a
point that will make the greatest profit. This
price is higher than a competitive price and
will result in less production.
10.
A business owner’s decision to show more care for
consumers is a decision to accept lower levels of profits.
F
T
Profits are an incentive for business to succeed. A
business that doesn’t care about its customers will not
make high profits. As Adam Smith (1723-1790) said, “It
is not from the benevolence of the butcher, the brewer or
the baker that we expect our dinner, but from their
regard for their own interest. We address ourselves not
to their humanity but to their self-love, and never talk to
them of our own necessities but of their advantages.”
The Production Possibilities Curve:
Scarcity, Trade-offs, and Opportunity
Costs
AP Microeconomics Unit I – Basic Economic Concepts
Warm-up
• Is there any limit to what the United States can produce?
• Is there any limit to what you can buy?
Today’s Objectives
1. Define scarcity, opportunity cost, and trade-offs.
2. Identify the conditions that give rise to the economic problem of scarcity.
3. Identify the opportunity costs of various recent decisions made by your school or
4.
5.
6.
7.
your community.
Construct PPCs from sets of hypothetical data.
Apply the concept of opportunity cost to a PPC.
Analyze the significance of different locations on, above, and below a PPC.
Identify the three questions every economic system must answer.
When faced with SCARCITY of resources, decisions have to be
made about how to use those resources
• Trade-offs
• Opportunity costs
Trade-offs
• This is the decision making process that is occurring in your mind right now!
• Am I going to pay attention to what Mr. White is saying, or am I going to
daydream?
• Am I going to come to class or go buy a lottery ticket?
• Am I going to stay in school or go find a full time job?
• Each and every decision you make has a cost!!! Not necessarily a cost in
dollar terms, but a cost in that you must give up something in order to get
more of something else.
Opportunity Cost
• The “price you pay” for each decision you make is called the
OPPORTUNITY COST.
• Opportunity cost is vital to the understanding of economics.
• “The amount of a product or service that must be forgone (given
up) in order to obtain more of the next best alternative product
or service”
Production Possibilities curve
(sometimes referred to as a production possibilities frontier)
• Used to illustrate:
• Productive Capacity
• Opportunity Costs
• Efficiency
• Productive
• Allocative
• Economic Growth/Decline
• Vital Link to Aggregate Supply (short/long run)
Production Possibilities Curve
Production Possibilities Curve
• The type of land resource suitable for growing Wheat is DIFFERENT
than the land resource for growing Rice.
• If a society wants MORE Rice, then as you convert land suitable for
growing Wheat (arable, relatively dry) so that you can grow Rice (wet,
swampy) it will become MORE costly to do that, in terms of Wheat
production
• We have INCREASING OPPORTUNITY COSTS of producing Rice in
terms of Wheat
Production Possibilities Curve
• Economies produce MORE that just Wheat and Rice.
• We produce LOTS of goods of many different types.
• We can broadly categorize goods into TWO categories
• Capital Goods
• Consumer Goods
The best way to illustrate Trade-Offs and
Opportunity Costs is to use a Production
Possibilities Curve
• The PPC shows the relationship between two goods:
1. Capital Goods (Investment Goods): Goods that satisfy our
wants INDIRECTLY and promote future growth or
“happiness” – Delayed gratification.
2. Consumer Goods: Goods that satisfy our wants DIRECTLY.
Instant Gratification
Production Possibilities Curve
Production Possibilities Curve
• The reason the PPC is bowed is because
of INCREASING OPPORTUNITY
COSTS.
• At Point A the economy gives up 10
capital goods in order to get 400 consumer
goods.
• 400 Consumer goods = 10 Capital goods
• 1 Consumer good = 10 Capital goods/400
• 1 Consumer good = .025 Capital good
Production Possibilities Curve
• The reason the PPC is bowed is because
of INCREASING OPPORTUNITY
COSTS.
• At Point B the economy gives up 10
Capital goods in order to get 200 more
Consumer goods.
• 200 Consumer goods = 10 Capital goods
• 1 Consumer good = 10 Capital goods/200
• 1 Consumer good = .05 Capital good
Production Possibilities Curve
• The reason the PPC is bowed is because of
INCREASING OPPORTUNITY COSTS.
• Not all resources are adaptable to alternative
uses.
• Resources used for Capital Goods may not
be suitable to make Consumer Goods (and
Vice Versa)
• Marsh land suitable for growing rice could
not easily be converted for use as a an
airport. It would be much more costly than
using farmland in Kansas.
Production Possibilities Curve
• Let’s take a closer look at the PPC
• What do the different points on the
PPC represent?
Production Possibilities Curve
• Each point represents Productive
Efficiency
• This means that this economy is
allocating ALL of it productive
resources in the least costly way
Production Possibilities Curve
• There are an infinite number of
points on the PPC. Where a
society decides to produce is called
Allocative Efficiency.
• This represents the combination of
Capital and Consumer Goods most
desired by the society
Production Possibilities Curve
• The whole PPC represents FULL
PRODUCTION
• Productive efficiency
• Full employment of resources
Production Possibilities Curve
• Do economies always produce on
the PPC? NO!
• Point E represents a point inside the
PPC.
• The area between point E and the
PPC represents underutilization of
resources or under-employment of
resources or unemployment. The
economy is being inefficient.
Production Possibilities Curve
• Do economies always produce on the
PPC? NO!
• Point F represents a point outside the
PPC.
• The area between point F and the PPC
represents overutilization of resources
• It represents a combination of Capital
and Consumer Goods that is currently
not possible with this economy’s
resources
Scarcity is the fundamental economic problem
• In order to solve the dilemma of scarce resources being
needed to fulfill unlimited wants, we must be answer the
3 fundamental economic questions
• What to produce?
• How to produce?
• For whom to produce?
Do activity 1-2
Absolute Advantage and Comparative
Advantage, Specialization and Trade
AP Microeconomics Unit I – Basic Economic Concepts
Warm-up?
• Why does South Korea produce so many TVs?
• Why does Costa Rica produce so much coffee?
Objectives
•
•
•
•
•
Define comparative advantage and absolute advantage.
Describe and give examples of the law of comparative advantage.
Explain how both parties in a trade gain from voluntary exchange.
Define specialization and exchange.
Use data to determine absolute and comparative advantage.
Introduction
• Activity 1-3 introduces absolute advantage and comparative advantage.
• Concepts will be covered in more detail in the international-trade unit.
• People trade because both parties stand to benefit when they engage in
voluntary exchanges.
Absolute Advantage and
Comparative Advantage
• What would life be like, if every person had to be totally self-sufficient and
could not specialize and trade.
• You always have to remember that individuals, not nations, trade. However,
specialization and trade can be accomplished both domestically and
internationally.
• The more we trade, the better off we all are.
Absolute Advantage and
Comparative Advantage
• ABSOLUTE ADVANTAGE
• One nation can produce more output with the same resources as the other.
• COMPARATIVE ADVANTAGE
• One nation can produce a good at a lower opportunity cost than the other.
• EXAMPLES OF COMPARATIVE ADVANTAGE
• Lawyer and secretary
• Doctor and nurse
• Comparative advantage is a powerful concept that helps
explain how mutual benefits can occur from exchange.
• A nation and an individual have a comparative advantage
when they can make one or more products at a lower
opportunity cost than another nation or individual.
• When producers specialize in the lower-cost product, they
can make additional goods. Which they can trade to other
producers for goods that would have been more costly to
make.
• To determine a comparative advantage, costs must be
measured in terms of what other products must be forgone
to make particular product. This relative measure is a subtle,
difficult and very important idea to understand.
• A nation’s or an individual’s comparative advantage will
change as the opportunity costs of products made available
by different trading partners change.
Absolute Advantage and
Comparative Advantage
• We discussed earlier the idea of a lawyer hiring a secretary in the field of
word processing.
• Remember we stated that the opportunity cost of the lawyer’s time spent as a secretary
is very high, perhaps $100 or more. The lawyer could even hire more than one
secretary for this amount and still come out ahead.
• The doctor/nurse situation is the same as the lawyer/secretary situation.
Determining Comparative Advantage
(Output Method)
• 1. Which nation has an absolute advantage in producing CDs? Neither country
• 2. Which nation has an absolute advantage in producing beef ? Canada
• 3. Which nation has a comparative advantage in producing CDs? Japan
• 4. Which nation has a comparative advantage in producing beef ?
• 5. Should Japan specialize in CDs or beef ?
CD’s
• 6. Should Canada specialize in CDs or beef ? Beef
Canada
Determining Comparative Advantage
(Input Method)
• 1. Which nation has an absolute advantage in producing CDs? Mexico
• 2. Which nation has an absolute advantage in producing beef ? Mexico
• 3. Which nation has a comparative advantage in producing CDs? Japan
• 4. Which nation has a comparative advantage in producing beef ? Mexico
• 5. Which country should specialize in CD production? Japan
• 6. Which country should specialize in producing beef ? Mexico
Activity 1-3
• You will be doing an activity that illustrates the same concept as it
relates to comparative advantage using inputs (minutes or hours
to produce a good) and outputs (number of goods produced per
hour or per minute).
• The key is that if one party trades the good for which it has the
lower opportunity cost for the good for which the other party has
the lower opportunity cost, both parties gain.
Productivity
AP Microeconomics Unit I – Basic Economic Concepts
Productivity
Ratio of the amount of goods and services produced (output) per
unit of productive resources used (input).
As a ratio, productivity can be increased by:
•
producing more goods and services with the same amount of resources
OR
•
by producing the same amount of goods and services with fewer resources.
Productivity
Personal and national standards of living are directly related to labor
productivity.
• The greater an individual’s labor productivity, the higher wage that individual can
command.
• People must produce more per person if they are to receive more per person.
Individual workers can increase productivity by investing in
education and training (human capital).
PIZZA PARTY!!!
Participate in a simulation that will demonstrate:
• How productivity is calculated
• The factors that can increase productivity
Work in teams of four to produce pizzas (made of paper).
How to make a pizza:
• Trace the template (a small paper plate) on a piece of 8.5″ x 11″ paper.
• Cut out the circle.
• Draw 10 pepperoni pieces, about 1″ in diameter, on the pizza, using the red
marker.
• Draw 15 black olive slices, ½″ to ¾″ in diameter, on the pizza, using the
black marker.
PIZZA PARTY!!!
• Each round will be three minutes long.
• At the end of each round, quality control experts will determine
if pizzas meet standards.
• Complete the data chart (Activity 8.1).
• Round 1:
• Each employee will work alone.
• Employees must complete one pizza before moving on to the next.
Thoughts on how to improve productivity?
Round 2:
• Assign each employee a different task.
• You may work on more than one pizza at a time.
• You are limited to the same resources as in Round 1.
Thoughts on how to improve productivity?
Round 3:
• Each team may acquire a capital good: a machine that pre-cuts pizza dough
(paper plates).
• Machine rental is $2.50 per round.
• Reorganize the factory.
How was productivity calculated?
Labor productivity = output per worker over a set time
• What happened to productivity between Round 1 and Round 2, and between
Round 2 and Round 3? Why did this occur?
• What happened to quality between Round 2 and Round 3?
• What effect did investing in capital goods (the pizza-cutting machine) have
on productivity?
• What effect did increased productivity have on average costs (row 10,
Activity 8.1)? Why is this important?
• What effect will increased productivity in the pizza factory
have on wages?
• What happens if labor productivity increases in the overall
economy?
• What costs were incurred by attempts to increase
productivity?
• What are the advantages and disadvantages of
specialization and division of labor?
• What else could the pizza factory do to increase
productivity?
• What should a company consider before investing in
capital, such as the pizza-cutting machine?
Factors That Increased Productivity
• Specialization/division of labor
• Assigning small, repeatable tasks at which workers gain expertise, as in Round 2
• Results in more output per unit of labor
• Increase in human capital
• Acquired through education/training, displayed in all three rounds
• Investment in capital goods
• Tools/machines/factories as in Round 3
• Technology
The Laws of Demand and Supply
AP Microeconomics Unit I – Basic Economic Concepts
Markets and Competition
• A market is a group of buyers and
sellers of a particular good or
service.
• The terms supply and demand refer
to the behavior of people . . . as
they interact with one another in
markets.
Markets and Competition
• Buyers (consumers) determine
demand
• Sellers (producers) determine
supply
DEMAND
• Quantity demanded is the amount of a good that buyers are willing and
able to purchase.
• Law of Demand
• The law of demand states that, other things equal (ceteris paribus), the quantity
demanded of a good falls when the price of the good rises.
• Substitution Effect
• Consumers have an incentive to substitute what is now a less expensive product for similar products
that are now relatively more expensive
• Income Effect
• Lower price raises real income, enabling buyers to buy more of the product
The Demand Curve: The Relationship between
Price and Quantity Demanded
• Demand Schedule
• The demand schedule is a table that shows the relationship between the
price of the good and the quantity demanded.
Catherine’s Demand Schedule
The Demand Curve: The Relationship between
Price and Quantity Demanded
• Demand Curve
• The demand curve is a graph of the relationship between the price of a
good and the quantity demanded.
Catherine’s Demand Schedule and Demand
Curve
Market Demand versus Individual Demand
• Market demand refers to the sum of all individual demands for a particular
good or service.
• Graphically, individual demand curves are summed horizontally to obtain the
market demand curve.
Shifts in the Demand Curve
• Change in Quantity Demanded
• Movement along the demand curve.
• Caused by a change in the price of the product.
Changes in Quantity Demanded
Shifts in the Demand Curve
• Change in Demand
• A shift in the demand curve, either to the left or right.
• Caused by any change that alters the quantity demanded at
every price.
Shifts in the Demand Curve
• Determinants of Demand – a change in any of the following causes a
change in demand and will shift the curve:
• Number of consumers
• Income of consumers
• Complement price
• Expectations
• Substitute price
• Tastes and preferences
Shifts in the Demand Curve
Shifts and Changes in Demand (cont.)
• A closer look at changes in income:
• Normal Good (or Luxury Good)
• Consumers demand more when their
income increases
• Inferior Good
• Consumers demand less when their
income increases
Consumer Income
Normal Good
Consumer Income
Inferior Good
Diminishing Marginal Utility
• Principle of Diminishing Marginal Returns: general tendency
for marginal utility to decrease as the quantity of a good
consumed increases
• Can be used to determine one’s individual demand curve for a
product
• Measured in units of utility
Consumer Surplus
• Consumer Surplus = marginal
benefit from a good minus the
price paid for that good, summed
over the quantity consumed
• How to calculate consumer
surplus…
SUPPLY
• Quantity supplied is the amount of a good that sellers are
willing and able to sell.
• Law of Supply
• The law of supply states that, other things equal (ceteris
paribus), the quantity supplied of a good rises when the
price of the good rises.
The Supply Curve: The Relationship between
Price and Quantity Supplied
• Supply Schedule
• The supply schedule is a table that shows the relationship
between the price of the good and the quantity supplied.
Ben’s Supply Schedule
Price of Ice Cream Cones
Quantity of Cones Supplied
$0.00
0
0.50
0
1.00
1
1.50
2
2.00
3
2.50
4
3.00
5
The Supply Curve: The Relationship between
Price and Quantity Supplied
• Supply Curve
• The supply curve is the graph of the relationship between the
price of a good and the quantity supplied.
Ben’s Supply Schedule and Supply Curve
Market Supply versus Individual Supply
• Market supply refers to the sum of all individual supplies for all sellers of a
particular good or service.
• Graphically, individual supply curves are summed horizontally to obtain the
market supply curve.
Shifts in the Supply Curve
• Determinants of Supply– a change in any of the following causes a change
in supply and will shift the curve:
• Resource prices
• Expectations
• Number of producers
• (level of) Technology
• Government actions (taxes, subsidies, regulations)
• Other (related) goods prices
Shifts in the Supply Curve
• Change in Quantity Supplied
• Movement along the supply curve.
• Caused by a change in the price of the product.
Change in Quantity Supplied
Shifts in the Supply Curve
• Change in Supply
• A shift in the supply curve, either to the left or right.
• Caused by a change in a determinant other than price.
Shifts in the Supply Curve
Producer Surplus
• Producer Surplus: amount seller is
paid minus the seller’s cost
• Also the area under the equilibrium
price and above the supply curve
• How to calculate producer surplus…
• (HINT: Same way as consumer
surplus…)
SUPPLY AND DEMAND TOGETHER
• Equilibrium refers to a situation in which the price has reached
the level where quantity supplied equals quantity demanded.
• Equilibrium Price and Quantity
• On the graph, it is where supply and demand intersect
SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
Price of Ice Cream Cone
Quantity Demanded
Price of Ice Cream Cone
Quantity Supplied
$0.00
19
$0.00
0
0.50
16
0.50
0
1.00
13
1.00
1
1.50
10
1.50
4
2.00
7
2.00
7
2.50
4
2.50
10
3.00
1
3.00
13
The Equilibrium of Supply and Demand
Disequilibrium
• Surplus
• When price > equilibrium price, then quantity supplied >
quantity demanded.
• There is excess supply or a surplus.
• Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Markets Not in Equilibrium
Disequilibrium
• Shortage
• When price < equilibrium price, then quantity demanded >
the quantity supplied.
• There is excess demand or a shortage.
• Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
Markets Not in Equilibrium
Equilibrium
• Law of Supply and Demand
• The price of any good adjusts to bring the quantity supplied
and the quantity demanded for that good into balance.
How an Increase in Demand Affects the
Equilibrium
How a Decrease in Supply Affects the
Equilibrium
Economic Systems
How do we answer the 3 main economic questions?
3 questions faced by every society
• What to produce?
• How to produce ?
• For whom to produce?
3 Types of economies
Command Economy
•
•
•
•
•
All economic decisions made solely by the government
Gov’t owns or controls most resources
Planners decide what to produce, how to produce, and for whom to produce.
Command decisions can be democratic or authoritarian.
Citizens living under the command economy have NO freedom of choice.
Command Economy (cont.)
• Some examples of command economy include China and U.S.S.R
• Under the command economy, the U.S.S.R collapsed, leading us to question
whether or not the command economy can succeed.
Pure Market Economy
• All economic decisions are made by people engaged in voluntary exchange.
• Consumers determine what to produce while producers determine how to
produce.
• All resources are privately owned.
• Government’s role limited to providing laws protecting property rights.
Pure Market Economy
• Income depends on the productive resources a person has to sell.
• Market prices are signals that affect consumption and production.
• Sometimes called free enterprise system or capitalism
Traditional Economy
• Economic decisions repeat those made in earlier times.
• Economic decisions heavily influenced by religion and culture
• Traditional economy is often found in underdeveloped, agricultural parts of
South America, Asia and Africa.
Mixed Economy
• Mixed economy incorporates aspects from all of the different systems of
economy.
• The United States is an example of a mixed economy.We have a diverse mix
of freedoms and regulations that is constantly changing in our economy.
Marginal Analysis
How much of something should we do?
Will you do all you can to get an A on your test
Monday?
• Why do you want an A?
• What’s the benefit of an A over a B or C?
• What will you give up to study the amount of time needed to get an A?
Marginal analysis
• What it is: the tool economists use to make these allocation decisions
• It’s simple!
• If the marginal benefit from another unit of some activity exceeds the marginal cost
of that unit, you should undertake that extra unit of the activity.
• If the marginal benefit of the extra unit is less than the extra cost of that unit, do not
take on the extra unit.
MC-MB Graph
So…
Given the marginal cost of each extra hour devoted to studying for your exam,
compared to the marginal benefit of receiving an A rather than a B or a C, how
many hours are you really willing to devote to your exam???