Economics
Fundamental Economic Principles and Economic Models. Фундаментальные принципы экономики и экономические модели.
Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do. 1) Resources are scarce. A resource is anything that can be used to produce something else. A resource is scarce when the quantity of the resource available isn’t large enough to satisfy all productive uses. 2) Opportunity cost. The real cost of an item is its opportunity cost: what you must give up in order to get it. 3) Marginal Principal. Economists normally assume that people are rational. Many economic decisions involve questions not of “whether” but of “how much”. Such decisions must be taken by performing a trade-off at the margin—by comparing the costs and benefits of doing a bit more or a bit less. Decisions of this type are called marginal decisions. The study of such decisions is known as marginal analysis. Marginal principal: Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. 4) Exploit opportunities. Normally, individuals will exploit opportunities to make themselves better off. Furthermore, individuals will continue to exploit these opportunities until they have been fully exhausted. If opportunities change, so does behavior: people respond to incentives.
Interaction of choices is a feature of most economic situations. My choices affect your choices, and vice versa. 1) There are gains from trade. In a market economy, individuals engage in trade: They provide goods and services to others and receive goods and services in return. There are gains from trade: people can get more of what they want through trade than they could if they tried to be self-sufficient. This increase in output is due to specialization: each person specializes in the task that he or she is good at performing. The economy, as a whole, can produce more when each person specializes in a task and trades with others. 2) Markets move toward equilibrium. An economic situation is in equilibrium when no individual would be better off doing something different. Any time there is a change, the economy will move to a new equilibrium. 3) Resources should be used as efficiently as possible to achieve society’s goals. An economy is efficient if it takes all opportunities to make some people better off without making other people worse off. Equity means that everyone gets his or her fair share. Since people can disagree about what’s “fair,” equity isn’t as well-defined a concept as efficiency. 4) Markets usually lead to efficiency. The incentives built into a market economy already ensure that resources are usually put to good use. Opportunities to make people better off are not wasted. Exceptions: market failure, the individual pursuit of self-interest found in markets makes society worse off => the market outcome is inefficient. 5) When markets don’t achieve efficiency, government intervention can improve society’s welfare. Why markets fail? 1) Individual actions have side effects not taken into account by the market (externalities). 2) One party prevents mutually beneficial trades from occurring in the attempt to capture a greater share of resources for itself. 3) Some goods cannot be efficiently managed by markets.
A
model
is
a simplified representation of a real situation that is used to
better understand real-life situations.
Production possibility frontier. It illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given production of the other. It illustrates: opportunity cost, efficiency, and economic growth. There are two basic sources of growth: an increase in factors of production, resources such as land, labor, capital, and human capital, inputs that are not used up in production, and improved technology.
C
omparative
vs. Absolute Advantage. An
individual has a comparative
advantage
in producing a good or service if the opportunity cost of producing
the good is lower for that individual than for other people. An
individual has an absolute
advantage
in an activity if he or she can do it better than other people.
Having an absolute advantage is not the same thing as having a
comparative advantage. Thus, mutual benefit will arise from an
agreement for specialization. It explains
the source of gains from trade between
individuals
and countries.
The circular-flow diagram is a model that represents the transactions in an economy by flows around a circle. It describes the flow of money and products throughout the economy in a very simplified way. The model represents all of the factors in an economy as either households or firms (companies), and it divides markets into two categories: 1) markets for goods and services; 2) markets for factors of production (factor markets)