Natsagdorj 1

Nandin Natsagdorj
Michael Manove
Economics 101
15 September 2015
Chapter 1

People are rational- People weigh the costs and benefits

People respond to economic interests
Optimal decisions are made at margin- optimal decisions is to continue any activities

up to the point where MB=MC

-Prices that reflect all opportunity costs provide the best incentives
When deciding how many units to buy, sell or use, marginal benefits and marginal

costs should be compared.

The marginal benefit of the last unit that you buy should be at least as large as the
marginal cost but they do NOT have to be equal

Trade off: Due to scarcity (unlimited wanted but limited resources), producing more of one
good/service means producing less of another
Opportunity cost: The highest valued alternative that must be given up to engage in an
activity (The sacrifice)
Centrally Planned Economy: an economy which government decides how economic
resources are allocated
Market Economy: Decisions of households and firms interacting in market allocate
economic resources.
-

Market economies rely on privately owned firms to produce goods and serives
Meets wants of consumers
Firms compete for quantity at the lowest price
Competition will force firms to continue producing and selling goods and services as
long as the Marginal Benefit to Consume > Marginal Cost to Produce

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Mixed Economy: Government plays a significant role in the allocation of resources
Productive efficiency: Good service produced at the lowest possible cost
Allocative efficiency: Production in accordance with consumer or societys preferences
Equity: Fair distribution of economic benefits
Positive Analysis: The what is
Normative Analysis: The what ought to be
Production: the transformation of some goods and services (inputs) to other goods and
services (outputs)
Distribution: In primitive economies, people produce for themselves and consume most of
their own production.
-

In more complex economies, efficient specialist producers use large quantities of

inputs to produce large quantities of outputs.

Outputs must be distributed to consumers. Inputs must be distributed to producers.

Wealth: refers to the capacity to create valued goods and services.

Wealth takes many forms:
1. Physical capital, (buildings, roads, machines, ships, cars, stores and warehouses filled
with goods;
2. Human capital: education and training, which makes people more productive; Good
governmental institutions;
3. Social capital: productive social and economic organizations, private and public.
Economists want to understand why some societies have far more wealth than others.
Economic Agents:agent is economic jargon for a person or group that plays an active role
in the economy
1. Households: individuals living alone, or small groups living together (often related)
and making joint economic decisions.
2. Firms: individuals producing alone, or groups of people producing together.
3. Governments: groups of people who jointly regulate households and firms.
- Governments may be viewed as specialized firms with regulatory functions.

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Governments also provide public goods, [to be discussed later].

Households, firms and governments are composed of many of the same people,
playing different roles.

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Chapter 2: Trade offs, Comparative Advantage, and the Market System

Productive Possibilities Frontier: A curve showing the maximum attainable maximum

combinations of two products that may be produced using current resources
-

Inside frontiers are inefficient

Outside frontiers are unattainable
Trade-offs are illustrated
Economy moves down from PPF it is experiencing an increased marginal opportunity

cost
The more the resources used for an activity the smaller the activity?
Outwards shift of the PPF means economic growth.
Economic Growth: is the ability of an economy to increase the PPF

Trade: act of buying and selling

People trade on the basis of comparative advantage
Comparative advantage: producing good/service at the lowest opportunity cost- People are
better off specializing in an specific good or service and trading that with another
Absolute advantage: Producing more of a good or service using the same resources

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Chapter 3: Demand and Supply
Perfect competition: A market structure that has
1.
2.
3.
4.
5.
6.

One homogeneous good

Many sellAers and buyers
Voluntary exchange
Full information and perfect foresight
Rational, self-interested agents
Free entry to the market

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Works Cited