Mircro Chapt 1 Exam 1

• for the individual choice
• for the choice interaction
• for the economy-wide interaction

Individual choice; the decision by an individual of what to do, or what not to do

• Resources are scarce
• the real cost of something is what you must give up to get it
• "How much?" is a decision at the margin
• People usually take advantage of incentives

• A resource is anything that can be used to produce something else
• ex: kand, labor, capital
• resources are scarce: unlimited needs with limited resources
• ex: fossil fuels, lumber, (clean), water/ air, intelligence

• the real cost of an item is it OPPORTUNITY COST: what you must give up in order to get it
• Opportunity cost is crucial to understanding individual choice
• Its all about what you have to forgo, but remember its the forgone value of the BEST ALTERNATIVE ACTIVITY ONLY, not the sume of all

Trade off b/w costs and benefits of doing something

• making trade off at the margin
• comparing the costs and benefits of doing a little bit more of an activity vs. doing a little bit less

• An incentive is anything that offers rewards to people who change their behavior
• ex: wage increase -> more people want to work
• Ex: price of gasoline increase -> more people demand fuel- efficient vehicles
• People respond to these incentives (or, disincentives)

Interaction of choices: my choices affect your choices, and vice versa

• There are gains from trade
• markets move toward equilibrium
• efficient usage of resources is a good thing for the society
• markets usually lead to efficiency
• when markets fail, government intervention can improve social welfare

• Trade in a market economy: provide goods and services to others and receive other g/s in return
• Gains from trade: get more of what they want through trade than they could under self sufficiency...

• each person specializes in the task that he or she is good at performing
• the economy, as a whole, can produce and consume more

• in an economic sense is a situation when no individual woul be better off doing something defferent
• anytime there is a change the conomy will move to a new equilibrium

an economy is efficient if all opportunities are take to make people better off w/o making other people worse off

• equity: everyone gets his/her fair share..."Fair"?
• Ex. Handicapped -designaed parking spaces in a bus parking lot
• Equity side: making life "fairer"for the andicapped people
• Efficiency side: letting several parking spaces left unused
• How far should we go?

• The incentives built into a market economy help resources be used efficiently
• Prices are set where buyers and sellers agree with
• No opportunities are left unexploited

Exceptions: market failure

• the individual pursuit of self-interest in the markets can make society worse off
• the market outcome is inefficent

• when producers (sellers) shift cost to others
• Pollution, for ex, is a by product of manufacture
• Total cost = seller's production cost + pollution cost
• When pollution costs are shifted, supply is greater than socially optimal, and so is the pollution

• when consumers (buyers) may create benefits for others
• vaccinnations, for ex, can prevent neighbors from getting the flu
• Total benefit= individual benefit + benefits to others
• when more people enjoy "free ride" the aggregate demand for vaccinations is less the socially optimal

• The markert outcome is socially optimal (socially efficient) only when...
• the sellers pay the full costs of production
• the buyers capture the full benefits of g/s
• Government can help the market achieve the socially efficient level of outcome with regulations, taxes, and fines (for negative externalities) or subsidies (for positive externalities)

• 1. One person's spending is another person's income
• If you spend less at a grocery store, ther employees may either lose their jobs, or take pay cuts
• 2. Overall spending may exceed or fall below the economy's production capacity (or potential output)
• if spending exceeds potential output, inflation is likely
• if spending falls below pontential output, economic recession and increase in unemployment are likely
• 3. Government policies can change spending
• Monetary/fiscal policies