Notes #1. VI) Exchange, production, specialization and entrepreneurship make scarcity less burdensome A) Middlemen B) Money

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1 Notes #1 Introduction I) Definition of economics II) Scarcity and scarce goods III) We all have to make choices IV) Opportunity cost V) Methodology A) Positive economics B) Normative economics VI) Exchange, production, specialization and entrepreneurship make scarcity less burdensome A) Middlemen B) Money VII) Four questions every economy must answer 1) What? 2) How? 3) When? 4) For whom? VIII) Markets and prices allocate resources in a private property right (capitalistic) system A) Efficiency IX) Institutions support the market system Financial Intuitions, (banks, stock markets, insurance); Contract law Constitutional constraints on government Private property rights Conditions for the existence and maintenance of private property rights A) Individuals have the right to own and control the use of property, and the expectation that that right will continue into the future B) Individuals have the right to exchange their property in voluntary transactions with others, that is, they have the right to buy and sell (all?) economic goods and services C) In a private property right system, property is acquired by production and voluntary exchange D) Property rights must be enforced

2 X) Ten Principles 1) People face tradeoffs 2) The cost of something is what you have to give up to get it 3) Rational people think on the margin 4) People respond to incentives 5) Trade can make everyone better off 6) Markets are usually a good way to organize economic activity 7) Governments can sometimes improve market outcomes 8) A country s standard of living depends on its ability to produce goods and services 9) Prices rise when the government prints too much money 10) Society faces a short-run tradeoff between inflation and unemployment

3 Notes #2 Exchange and Demand I) The individual is the unit of analysis II) Individuals are rational, they maximize their utility III) The postulates of human behavior Postulate 1 (we all confront scarcity) Every individual faces scarcity. Postulate 2 (variety is the spice of life) Individuals desire variety in their consumption choices. Postulate 3 (the substitution postulate ) Individuals are willing to give up some of any economic good in exchange for some other good or goods. Postulate 4 (diminishing personal marginal value) The more of a good an individual consumes the greater the total personal satisfaction resulting from consumption of the good, and thus the higher the utility of the individual. However as the individual consumes more and more units of the good the additional satisfaction resulting from consuming an additional unit (the personal marginal value) will diminish. Postulate 5 (people are different) Individuals have different tastes and preferences. Postulate 6 (people will strive to improve their lot in life) People are innovative and rational. III. Three Subpostulates Subpostulate 1 (rank any two bundles) Individuals are assumed to be able to rank any two bundles of the two goods. Subpostulate 2 (more is better) If a bundle contains more of one good than some other bundle and no less of the other good it will be preferred. Subpostulate 3 (preference rankings are transitive) Individuals preference rankings are transitive. IV) The law of Demand

4 Notes #3 I. Specialization and the gains from trade A. Production possibilities B. The principle of comparative advantage C. Absolute advantage II. Opportunity cost and comparative advantage III. International Trade

5 Notes #4 I) The Law of demand II) Market demand III) Substitutes, complements, income, tastes and future prices

6 Notes # 5 Supply I) Firm owners maximize profits II) Large number of small firms in each industry III) Each firm in an industry produces a identical product IV) Assume firms use only labor and capital and that capital is fixed short run. V) The law of diminishing marginal returns: Holding capital constant as we add more and more units of labor, total product increases but the increases in total product diminish. What is the definition of capital in this context? VI) Law of supply, in a given period of time, when the price of a good increases firms will increase the quantity supplied, holding capital and the prices of inputs fixed. Supply and Demand I) Market equilibrium II) What do markets do? Allocate resources Ration scarce goods how? III) Applications Price controls ration, hurricanes Rent control zoning laws Farm price supports Minimum wages labor unions