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ECONOMICS

As the old song goes, money makes the world go 'round . . . However, without the proper knowledge, its difficult to figure out exactly how.
Econs relentlessly applicable. Once you get a feel for the tools of the field, you can apply them everywhere. a UC Berkeley student
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ECONOMICS
Definition From the Greek word Oikonomia household management A social science that studies how societies use scarce resources to produce valuable goods and services, and distribute them among different people Samuelson and Nordhaus Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs and desires. It is the study of how man chooses to allocate scarce resources to buy or produce goods and services that best satisfies his NW & D.
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Economics is an important subject because of the basic problem of scarcity and the desire for efficiency. S&N
Scarcity Scarcity has two sides: the infinite nature of human wants and the finite or limited nature of resources available to produce goods and services A. Unlimited Human Wants - A situation in which goods are limited relative to mans needs - Goods are scarce because demand exceeds supply. - Humans want to maximize leisure time, wealth, health, happiness utility, but are subject to constraints or scarcity. Scarcity leads to tradeoffs/choices: one can have more money by working more but have less family or leisure time
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B. The Resources (or Inputs)


- The other side of the scarcity equation relates to the finite nature of resources. The term resources covers all inputs used to produce outputs or goods and services. Economists also refer to these inputs as factors of production. They are divided into three categories: 1. Land - the natural resources (ie. mineral deposits) & environmental resources 2. Labor - human resources in the sense of people as workers 3. Capital - resources created by humans to produce other goods Durable goods like tools, machinery and factories money 4.Enterprise - the human resource of organizing the other three factors to produce goods and services (the entrepreneurial spirit and ability!).
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2 Sector Economy
Circular Flow Diagram
Payments for goods and services

Goods and services

FIRMS

HOUSEHOLD

Factor services
Factor payments (wages, interest, rent, profit)
Intro to Nat'l Income Accounting 8

- Technology A factor that determines how an economy combines inputs to convert them into outputs. - ie. Raw students enter college to finish as knowledgeable graduates - Since these factors are limited, therefore there is some maximum quantity of health care that can be produced at any one time. We can explore this idea theoretically by using what economists call a Production Possibility Frontier (PPF). Production Possibility Frontier (PPF)
A graph that illustrates that illustrates the concepts of Resource Allocation and Efficiency. It shows the possible outputs that an economy with limited resources is confronted with, that is, the maximum amounts of goods that can be produced by an economy (or by any firm i.e. a telecom co. or hospital)
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It assumes: (1) Only 2 goods are produced in the economy Rice & Cellphones (to illustrate the concepts in a simple manner); (2) A given state of production technology; and Amount of resources are fixed. Maximum Production Possibilities:

Possibilities A B C D E F

RICE
0 1 2 3 4 5

CELLPHONES 15 14 12 9 5 0
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15 14
CELLPHONES 12 9

RICE

Graph the PPF Curve. Indicate where the point U (2 Rice & 7 Cellphones) and point I (4 Rice & 12 Cellphones) are.
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Production Possibility Frontier


15 14 CELLPHONES 12 9 A B

C D

E 5 U F 0 1 2 3 4 5

RICE

Production along the PPF curve are maximum possible outputs given the resources and technology -- efficient Production inside the PPF curve (pt.U) does not maximize utilization of resources -- inefficient

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Expanding the PPF Curve 1. By introducing new technology - Technology improves the productivity of the factors of production, so that the same quantity of factors produces more treatments. 2. By increasing the resources - Acquiring additional equipment and personnel would increase the maximum possible combinations of output beyond what the original resources could produce. Allocative Efficiency - An allocation of resources is efficient if it is impossible to change that allocation to make one person better off without making someone else worse off. - Maximizing output (or level of satisfaction) from the given resources and technology - No wastage in resources

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Opportunity Cost - The cost of something in terms of an opportunity foregone, or the value of the sacrificed alternative, or the most valuable foregone alternative - i.e. If a city decides to build a sports center on a lot, the city has foregone the opportunity to build a hospital on that same land
Origins of Economics - Adam Smiths invisible hand from the Wealth of Nations, 1776 "...By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
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The Three Problems of Economic Organization Every society must make choices to resolve 3 basic economic problems: 1. What outputs/goods to produce and in what quantity given the wide range of all possible goods? 2. How to produce them? what technology to use 3. For whom should the outputs be produced and distributed? what is the distribution of income and consumption among different individuals and classes?
Types of Economic Systems 1. Market Economy - An economic system in which the what, how and for whom questions on resource allocation are primarily determined by supply and demand in markets. - In this system, firms, motivated by profits, buy inputs and produce and sell outputs.
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- Households, with their factor incomes, go to markets and determine the demand for goods - The interaction of firms supply and households demand then determines the prices and quantities of goods. - Prices provide the signal on which goods are scarce and which are not relative to societys demands - It has little government intervention. An extreme case of no government intervention is called laissez-faire economy. - Found in most democratic countries.

2. Command Economy - An economic system in which the what, how and for whom questions on resource allocation are primarily determined by government it does this through its ownership of most resources and its power to enforce decisions. - A centrally planned economy - Found in the former Soviet Union/communist states where the govt owns most of the resources (land and capital); owns and directs the operations of most enterprises; and the employer of most workers 16 All societies are mixed economies.

Two Branches of Study 1. Microeconomics deals with the behavior of individual economic units such as markets, consumers and firms. It considers individuals as suppliers of labor and capital and as ultimate consumers of the final product. i.e. determination of a products price; reaction of consumers or firms to price changes; factors that affect peoples consumption of goods
2. Macroeconomics concerned with the behavior of the economy as a whole aggregating the behavior of individuals, firms and markets with respect to national output and income, price levels, trade, employment and other aggregate economic variables.
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