8/21/2007 ECONOMICS 101 LECTURE 1&2 / CHAPTER 1

I) Economics = Scarcity + Insatiability definition: the study of how people, individually and collectively, allocate their limited resources to try to satisfy their unlimited wants Scarcity - occurs because human wants exceed the production possible with our limited time and resources - unlimited wants vs. limited resources - forces us to choose Insatiability - self-interest - ex: story of choosing between saving millions of lives and cutting off finger - rationality - forward-thinking - time consistency Goods - any item or service that adds to human happiness - commodities: tangible goods that can be bought and sold (i) ex: cars, books, VCRS - services: intangible goods (i) ex: haircuts, police protection, car wash - free goods: anything of value that is not scarce (i) ex: air, sunlight Economic Bad - anything that reduces happiness - ex: garbage Value in use - what you get out from using the item Value in exchange - the value you get out of an item from trading it - the motivating factor for firms to produce goods II) Production using technology to apply energy to materials in ways that make the materials more valuable, or that otherwise Technology: consists of the recipes available for use in combining and reshaping resources in production process Production Resources

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labor (i) the physical and mental talents that people can make available for production (ii) paid in wages - capital (i) land or other resources transformed (improved) to be more productive (ii) paid in interest - land (i) all natural resources (ii) paid in rent - entrepreneurship (i) combining land, labor, and capital to produce goods while incurring risks in a quest for profits III) Basic Choices What economics goals will be produced? How will resources be used in production? Who will get to consume the economics goods? - determine economic structure of society and their policies (aka social infrastructure) IV) Opportunity Costs definition: the value of the next best alternative surrendered when a choice is made whatever one has to give up in order to get something V) Monetary (Absolute) Prices absolute prices are prices in terms of some monetary unit Relative Prices - the prices of goods or resources in terms of each other, and are computed by dividing their absolute prices by one another - display information about buyers wants and sellers costs (i) ex: farmers know that consumers value grapes roughly twice as much as they do limes because grapes sell consistently for $2 a pound, while limes sell for only $1 a pound - sellers view relatively high prices for goods as incentives, while low prices are disincentives that push resources into alternative types of production - act as rationing devices relative prices guide decisions; changes in absolute prices ultimately affect most decisions only to the extent that relative prices are distorted VI) Economic Efficiency (Pareto Efficiency) achieved when we produce the combination of outputs with the highest attainable total value, given our limited resources -

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Decomposed to: - Allocative Efficiency (i) requires the pattern of national output to mirror what people want and are willing and able to buy (ii) parallels economic choice #1 (What?) - Productive (technical) Efficiency (i) requires minimizing opportunity cost for a given value of output (ii) parallels economic choice #2 (How?) - Distributive Efficiency (i) requires that specific goods be used by the people who value them relatively the most (ii) parallels economic choice #3 (Who?) (iii) divisible into: (a) distribution of income/wealth (b) distribution of goods Economy-Wide Efficiency - all opportunity costs must be minimized to attain an economy-wide state of efficiency that combines all three kinds of efficiency - it is impossible for anyone to gain without some else losing - every drop of potential net profit must be squeezed from the resources available

VII) Positive vs. Normative Economics Positive Economics - addresses what is and predicts observable and testable tendencies in economics relationships - can be true or false - theories Normative Economics - depends on value judgments and addresses what should be - often contains should or ought VIII) Macroeconomics focuses on aggregate variables relevant for an entire national economy, or even the world economy the big picture normative goals of macro policy: - high employment - price-level stability - economic growth

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IX) Microeconomics the study of individual decision-making, resource allocation, and how relative prices, outputs, and the distribution of income are determined major goals of micro policy: - efficiency - equity - freedom X) Specialization causes broadly distributed economic gains