ECON 1 Lecture Notes - Lecture 2: Scientific Method, Absolute Advantage, Fiscal Policy
4/5/18
The Big Ideas cont.
1. Incentives matter
2. Markets are usually a good way to organize economic activity
3. People face tradeoffs
4. Rational people think at the margin
5. The power of trade
6. The Importance of Wealth and Economic Growth
- Cetral idea: a outr’s standard of living depends on its ability to produce goods and services
- E: Japa ad it’s ailit to produe e/adaed teholog → higher standard of living
- Huge variation in living standards across countries and over time
• Avg income in rich countries is +10x avg income in poor countries
• US standard of living today is 8x more than 100 years ago
- Central idea: the most important determinant of living standards is productivity (the amount of
goods/services produced per unit of labor)
- Productivity depends on the equipment, skills, and technology available to workers
- Ex: Cuba being self-sufficient has made it very difficult for them to come out of this
- Other factors (labor unions, competition from abroad) have far less impact on living standards
- Ex: Argentina, and its protectionism put a huge burden on consumers
• Overall prices of goods/services are increasing
• Producers no longer able to sell goods bc too high
• Producers have to layoff workers → high unemployment
7. Institutions matter
- Central idea: the important role for government is to enforce property rights (police, courts,
etc.)
- People are less inclined to work, produce, invest, or purchase if large risk of their property
being stolen
• A restaurat o’t serve meals if customers do not pay before they leave
- Market failure: he the arket fails to alloate soiet’s resoures effiietl
• Causes
1. Externalities – when the production/consumption of a good affects bystanders
(pollution)
2. Market power – a single buyer/seller has substantial influence on market price
(monopoly)
- Public policy may promote efficiency
- Government may alter market outcome to promote equity
- If the arket’s distriutio of eooi ell-being is not desirable, tax or welfare policies can
hage ho the eooi pie is diided
8. Economic booms and bursts cannot be avoided but can be moderated
- Policymakers use fiscal policy and monetary policy to attempt to smooth out this economic
volatility
• Fiscal policy – use of govt revenue collection (taxation) and expenditure (spending) to
influence the money
• Monetary policy – govt controls the supply of money, often targeting a rate of interest
for the purpose of promoting economic growth and stability
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The big ideas cont: incentives matter, markets are usually a good way to organize economic activity, people face tradeoffs, rational people think at the margin, the power of trade, the importance of wealth and economic growth. Ce(cid:374)tral idea: a (cid:272)ou(cid:374)tr(cid:455)"s standard of living depends on its ability to produce goods and services. E(cid:454): japa(cid:374) a(cid:374)d it"s a(cid:271)ilit(cid:455) to produ(cid:272)e (cid:374)e(cid:449)/ad(cid:448)a(cid:374)(cid:272)ed te(cid:272)h(cid:374)olog(cid:455) higher standard of living. Huge variation in living standards across countries and over time: avg income in rich countries is +10x avg income in poor countries, us standard of living today is 8x more than 100 years ago. Central idea: the most important determinant of living standards is productivity (the amount of goods/services produced per unit of labor) Productivity depends on the equipment, skills, and technology available to workers. Ex: cuba being self-sufficient has made it very difficult for them to come out of this. Other factors (labor unions, competition from abroad) have far less impact on living standards.
