Introduction
Start:
- Scarcity
- Individual Rationality
End:
- Efficiency (or inefficiency)
(Compared with "allocation"; e.g. stealing)
1. Ten Principles of Economics
1.1 How People Make Decisions
- Tradeoffs
- Cost (more concerned about opportunities, other alternatives)
- Margin (e.g. why something is cheap or not)
- Compare marginal cost and benefits to make decisions
- Incentives (planned economy vs market economy)
- Prices, Property Rights, ... are important incentives in the economy
- Consider the indirect effects of incentives
1.2 How People Interact
- Trade (Invisible hand)
- Markets
- Governments (Market failures)
1.3 How the Economy as a Whole Works
- Production
- Money
- Inflation and unemployment
Principle 1: People Face Trade-offs
Principle 2: The Cost of Something Is What You Give Up to Get It
Principle 3: Rational People Think at the Margin
Principle 4: People Respond to Incentives
Principle 5: Trade Can Make Everyone Better Off
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Principle 7: Governments Can Sometimes Improve Market Outcomes
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Principle 9: Prices Rise When the Government Prints Too Much Money
Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
2. Thinking Like an Economist
Economics as Science (explain) or Policy (change the world)
3. Interdependence and the Gains from Trade
3.1 Production Possibilities Frontier
Production Possibilities Frontier: the various mixes of output that an economy can produce.
Consumption Possibilities Frontier: If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier.
Trade expands the set of consumption opportunities.
3.2 How to measure the cost or advantage
Absolute advantage: the ability to produce a good using fewer inputs than another producer, used to compare the productivity of one person
Opportunity cost: whatever must be given up to obtain some item
Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer
It is comparative advantage that decides:
- Specialization: specializes in activities in which one has a comparative advantage.
- The Price of the Trade: must lie between the two opportunity costs.
Thus a country still needs to trade with others even it has absolute advantage on all aspects. Because:
- Having absolute advantage doesn't mean having comparative advantage.
- The gains from trade are based on comparative advantage, not absolute advantage.
Issue:
International trade can make some individuals worse off, even as it makes the country as a whole better off. When the United States exports food and imports cars, the impact on an American farmer is not the same as the impact on an American autoworker.