FMSC 290 Chapter Notes - Chapter 1: Invisible Hand, Market Economy, Opportunity Cost
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Chapter 1 – Ten Principles of Economics
* Knew already
+ Learned something
- Want to learn more about it
• + Economics is about scarcity, and how society manages its scare resources
• - Efficiency vs equality tradeoff
o For better equality, you could redistribute income from the wealthy to the poor +,
but this would only reduce the incentive to work and produce +
• * Opportunity cost – what must be given up to obtain any item
• - Marginal changes, how rational people my decisions by evaluating costs and benefits
o Eg. Student considers college for additional year. He compares fees and foregone
wages to the extra income he could earn with the extra year of education +
• * Trade can make everyone better off
o Some producers are better at producing some goods that others “specialization”
• * Market = group of buyers and sellers
o + Organizes economic activity (what to produces, how to do it, how much, and
who gets them)
• - Market economy
o Allocates resources through decentralized decisions of many households and
firms as the interact
• * Invisible hand
• + Government role is to enforce property rights, and can sometimes improve market
outcomes
o + People less inclined to work, produce, invest, or purchase if theft risk if high
• + A countries standard of living depends on its ability to produce goods and services
o + Productivity most important determinant of living standards
• * Prices rise when the government prints too much money (inflation)
o When there are more dollars available, the dollar has less buying power, it’s less
valuable, so prices must rise. Almost always caused by excessive growth in
quantity of money
o Faster government creates money, greater the inflation rate
• - In the short run, economic policies push inflation and unemployment in opposite
directions
o Negatively correlated; if inflation goes up, unemployment goes down
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