Summary Chapter 1 (2016)Apunte Inglés
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J. Sardà Magem
- An ECONOMY is a system for coordinating society’s productive activities, and ECONOMICS is
the social science that studies the production, distribution, and consumption of goods and
services. The US has a MARKET ECONOMY (an economy in which decisions about production
and consumption are made by individual producers and consumers pursuing their own self
interest). The INVISIBLE HAND harnesses the power of self-interest for the good of sfociety.
- MICROECONOMICS is the branch of economics that studies how people make decisions and how these decision interact. MARKET FAILURE occurs when the individual pursuit of selfinterest leads to bad results for society as a whole.
- MACROECONOMICS is the branch of economics that is concerned with overall ups and downs in the economy. Despite occasional RECESSIONS, the US economy has achieved long-run ECONOMIC GROWTH.
- All economic analysis is based on a set of basic principles that apply to three levels of economic activity. First, we study how individuals make choices; second, we study how these choices interact; third, we study how the economy functions overall.
- Everyone has to make choices about what to do and what not to do. INDIVIDUAL CHOICE is the basis of economics -if it doesn’t involve choice, it isn’t economics.
- The reason choice must be made is that RESOURCES (anything that can be used to produce something else) are SCARCE. Individuals are limited in their choices by money and time; economies are limited by their supplies of human and natural resources.
- Because you mush choose among limited alternatives, the true cost of anything is what you must give up to get it —> all costs are OPPORTUNITY COSTS.
- Many economic decisions involve questions not of “whether” but of “how much” -how much to spend on some good, how much to produce, and so on. Such decisions must be made by performing a TRADE-OFF AT THE MARGIN -by comparing the costs and benefits of doing a bit more or a bit less. Decisions of these type are called MARGINAL DECISIONS, and the study of them, MARGINAL ANALYSIS, plays a central role in economics.
- The study of how people should make decisions is also a good way to understand actual behavior. Individuals usually respond to INCENTIVES — exploring opportunities to make themselves better off.
Chapter 1 J. Sardà Magem - The next level of economics analysis is the study of INTERACTION —how mu choices depend on your choices, and vice versa. When individuals interact, the end result may be different from what anyone intends.
- Individuals interact because there are GAINS FROM TRADE: by engaging in the trade of goods and services with one another, the members of an economy can all be made better off.
SPECIALIZATION —each person specializes in the task he or she is good at— is the source of gains from trade.
- Because individuals usually respond to incentives, markets normally move toward EQUILIBRIUM — a situation in which no individual can make himself or herself better off by taking a different action.
- An economy is EFFICIENT if all opportunities to make some people better off without making other people better off without making other people worse off are taken. Resources should be used as efficiently as possible to achieve society’s goals. But efficiency is not the sole way to evaluate an economy: EQUITY, or fairness, is also desirable, and there is often a trade-off between equity and efficiency.
- Markets usually lead to efficiency, with some well-defined exceptions.
- When markets fail and do not achieve efficiency, government intervention can improve society’s welfare.
- Because people in a market economy earn income by selling things, including their own labor, on person’s spending is another person’s income. As a result, changes in spending behavior can spread throughout the economy.
- Overall spending in the economy can get out of line with the economy’s productive capacity.
Spending below the economy’s productive capacity. Spending below the economy’s productive capacity leads to a recession; spending in excess of the economy’s productive capacity leads to inflation.
- Governments have the ability to strongly affect overall spending, an ability they use in an effort to steer the economy between recession and inflation.