Economics 1 Spring 2012 Unit 1
What I expect you to know for the test:
Chapter 1
- Definition of Economics (remember, it has 3 main ideas): Page 2.
- Definition of Positive and Normative economics, and be able to label a particular statement as one or the other: Page 3.
- Definition of Opportunity Cost and how it affects our behavior (going to college or not, speed limit laws, etc.): Pages 6,7.
- What Ceteris Paribus means and how economists use it: Pages 14-15.
Chapter 2 (last topic is in Chapter 13)
- How to represent the outcomes of different allocations of resources on a Production Possibilities Frontier Diagram: Pages 40-42.
- The Law of Increasing Opportunity Costs, both what it is and why it is: Page 42.
- Production Efficiency and Inefficiency, both what they are and how to illustrate them on a PPF diagram: Pages 44-45.
- Why there is always at least one efficient point better than any inefficient point, but not every efficient point is necessarily better than that inefficient point: Handout
- How to illustrate Economic Growth on a PPF diagram and what 3 main forces cause economic growth: Pages 45-46.
- The Three Fundamental Questions of economics: Page 55,56.
- The two types of economic systems (Command and Market): Pages 55-57.
- A Market Economy is based on voluntary exchanges: Pages: Pages 55-57.
- How Price works as a Rationing Device and a Transmitter of Information in a market economy: Pages 5,6 and Page 57.
- What idea is meant by “The Invisible Hand”: Pages 53,54
- What Externalities are and how they affect the working of the invisible hand: Pages 291-292,301
Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By directing his industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Adam Smith, The Wealth of Nations (1776)
Chapter 2 Handout - What is the relationship between efficient and better?
1. Is it always better to be producing efficiently rather than inefficiently?
On the PPF below, A is efficient and B is inefficient. A also has little food. Most people would prefer to be in the inefficient country B. Efficient production does not mean the choice of what to make is a good one, merely that they are making whatever they choose to make as well as possible (getting as much of that as they possibly can). We are not saying that what they are making is a bad thing (like toxic sludge). It is still a good thing, merely that there were other better things they could have chosen to make instead.
The key thing here is that the efficient point has more of one thing, but less of the other; so if we really love the other thing, we will prefer the inefficient outcome. Choosing what to make badly and then making it well might be worse than choosing what to make well and making it badly.
Theorem 1: Not every efficient point is necessarily better than every inefficient one.
2. But what if the efficient point is a well chosen one, that is we are comparing making the 'same things' efficiently versus inefficiently? Now we will have more of both things (or the same amount of one and more of the other). Now we can say the efficient point is better.
Theorem 2: For every inefficient point, there is always at least one efficient point that is better. Choosing what to make well and then making it well has to be better than choosing what to make well and then making it badly.
As a test of your understanding, mark an efficient point C that must be better than B.
3. Is saying that it is better to have more of everything a positive or normative statement? Better statements are always normative. The belief that a life with more stuff is a better life is a value judgment.