Microeconomics Case

1.1: The Complexity of the Modern Economy

* ECONOMY- a system in which scarce resources are allocated among competing uses.

* An economy based on free-market transactions is self-organizing (consumers & producers act independently to pursue their own self-interests)

* Adam Smith:

o people pursue their own self-interest

* consumers: i.e.: shopping sales (pay less for more), responds to incentives (low prices)

* producers: i.e.: maximize profit

o economic order is efficient

* available resources are organized to produce & service what people want to buy and to produce them with the least amount of resources possible.

* Free-market economy: "guided by the invisible hand": refers to the relatively efficient order that emerges out of many independent decisions.

* Main Characteristics of Market Economies

o Self-interest: buying & selling what is best for families & self

o Incentives: sellers sell more when prices are high; buyers buy more when prices are low

o Market Prices & Quantities: prices & quantities are determined in free markets by buyers & sellers

o Institutions: activities are governed by institutions created by government (private property, freedom of contract, and the rule of law). Referred to as public goods (i.e.: police, hospitals, schools). So that you have the right to what is purchased (i.e.: no one would steal your car if it was parked outside, etc.)

1.2: Scarcity, Choice, and Opportunity Cost

* ECONOMICS- the study of the use of scarce resources to satisfy unlimited human wants.

* Resources:

o Factors of production: resources used to produce goods and services (i.e.: land, labour, and capital)

o Goods: tangible commodities (i.e.: cars, shoes)

o Services: intangible commodities (i.e.: haircuts, education)

o Production: the act of making goods and services

o Consumption: the act of using goods and services to satisfy wants

* Scarcity and Choice:

o Choices must be made about what to produce and how much each person will consume.

o Scarcity implies that choices must be made, and making choices implies the existence of costs.

o Opportunity cost: the lost of potential gain from other alternatives when one alternative is chosen (i.e.: 20km of road are best used instead to produce one hospital, the opportunity cost of a hospital is 20km of road; the opportunity cost of 20km of road is one hospital)

Production possibilities boundary: a curve showing which alternative combinations of commodities can just be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations

* Scarcity- unattainable combinations outside the boundary

* Choice- the need to choose among the alternative attainable points along the boundary

* Opportunity cost- the negative slope of the boundary

* Four Key Economic Problems

o Resource allocation- the allocation of an economy's scarce resources of land, labour, and capital among alternative uses.

* Questions relating to what is produce and how, and what is consumed and by whom, fall within the realm of microeconomics.

 Microeconomics: the study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system and government policies that seek to influence it

* Questions relating to the idleness of resources and the growth of productive capacity fall within the realm of macroeconomics.

 Macroeconomics: the study of the determination of economic aggregates, such as total output, total employment, the price level, and the rate of economic growth

1.3: Who Makes the Choices and How?

* Flow of Income and Expenditure:

o Factor markets:

o Goods markets:

o Distribution