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Economics Chapter 1 Notes - the Foundations of Economics

Autor:   •  February 20, 2018  •  1,691 Words (7 Pages)  •  610 Views

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- Microeconomics: Deals w/ smaller, discrete economic agents and their reactions and considers individual consumers, firms, industries, etc.

- Macroeconomics: Deals w/ wider view and considers measuring economic activity in economy, inflation, unemployment, etc.

We also have Positive vs. Normative Economics, which unlike its complex name, is simple: it is objectivity vs. subjectivity.

Positive statements are things such as “The unemployment rate in Country X is Y%” while normative statements are “Country X should place more emphasis on reducing unemployment rates.” Normative statements often use the words “ought” “should” “too much” “too little.”

Positive economics, therefore, are areas of economics that can be proven to be true or false; on the other hand, normative economics are areas that are open to personal opinion and belief.

Models in Economics

In economics, we build models to test and illustrate economists’ theories. Then, we manipulate these models to see the outcome if there is a change in one of these variables. In doing so, we keep all variables constant but that particular one. This is known as ceteris paribus (Latin for all other things equal).

We also make another assumption – that all humans are rational. Consumers seek maximum utility, and producers seek maximum profit. These theories are tested out under such an assumption; it is true that not everyone does, but in general, people act in such ways, and we henceforth assume so.

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The following is an example of circular flow diagram. This diagram shows us that g/s are provided to households, while factors of production are provided by the households. Likewise, both households and firms give and take money from each other, resulting in a circular flow of inputs and outputs, and a flow of money.

This example is a great example of assumption: in this model, we have ignored the government and the international trade, which are also very important in the economy.

Planned Economies vs. Free Market Economies

Free market model is also known as Capitalism. Here are a few characteristics of the model:

- Private property

- Free enterprise and free choice

- Competition and unrestricted markets

- Price determined by supply and demand

- “Invisible hand” – self-interest leads to increase social welfare

- limited role of government

Centrally planned model is also known as Command Economy. Here are a few characteristics:

- Public property

- Planners’ preferences

- Planner sets prices and allocates resources

- Incentive to produce by wage differentials

- Large role of government

Finally, we have the mixed model. It is often a free market model with government interference.

Government intervenes at a different levels in different countries, and the level of freedom depends on nation to nation. In this model we have the public sector and private sector which are affected by the government in following ways:

Public Sector: Provision of public g/s

Private Sector: policies lowering level of bad externalities produces by businesses, such as pollution, subsidies for merit good, excise duties on g/s

On the next page, we have the disadvantages of both rationing systems:

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Economic Growth vs. Economic Development

Economic growth is the real changes in production of g/s as measured by GDP or GNP. This is the quantitative growth.

GDP is measured by looking at the value of the output of g/s, expenditure on the g/s, or the total income of households. Any increase by inflation is ignored to not overstate its values.

Economic Development I concerns both the quantitative growth (this is necessary) and qualitative improvements, such as the quality of life, or the Human Development Index (HDI). We measure this because quantitative data is not sufficient measurement of economic development.

HDI is calculated by weighing up real income per head, adult literacy rate, average years of schooling, life expectancy. Then, nations are given values of 0 to 1. In 2007, Norway was the most developed country.

Economic welfare results from economic development. This could involve things such as anti-pollution measures.

Sustainable Development[pic 7]

In the United Nations, it has warned that economic growth cannot be sustained if we constantly degrade the environment and use up resources. Hence, the term sustainable development was introduced. We have to appreciate, also, the negative consequences of economic growth, and how resources are allocated accordingly.

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Final Pointers: The Foundations of Economics

Overview of Economics

Scarcity and Opportunity Cost

Factors of Production

Production Possibility Curve

Utility

Dividing up Economics

Models in Economics

Planned Economies vs. Free Market Economies

Economic Growth vs. Economic Development

Sustainable Development

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