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Summary Key Points of Principles of Economics Lecture 1-4
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This document summarizes the main points of Lecture 1-4 of the course Principles of Economics and connects the book and the lecture.
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Econ final most important stuffLecture 1&2:
12 basic principles:
1. Choices are necessary because resources are scarce
2. The true cost of something is its opportunity cost
3. ‘How much’ is a decision at the margin
4. People usually respond to incentives
5. There are gains from trade
6. Markets move toward equilibrium (=where their utility is maximised, meet at the most sustainable
price, where everybody is best off, where demand=supply)
Eg. price for apples too high: reduce price to increase demand
7. Resources should be used efficiently to achieve society’s goals
8. Markets usually lead to efficiency
9. When markets fail government intervention can improve society’s welfare
10. One person’s spending is another person’s income
11. Overall spending sometimes get out of line with the economy’s productive
capacity
12. Government policies can change spending
- Model= simplified version of reality
- Ceteris paribus = other things equal assumption
Production Possibility Frontier (PPF)
• A model for thinking about tradeoffs facing an economy
• A visual model of scarcity & efficiency
• Simplification: one economy/ two goods
• Shows the maximum quantity of one good that can be produced for any given quantity of the other
good. = opportunity cost
- If opportunity costs is not always the same = graph is not a straight line but bowed
- When line is curved: have to give up different amounts at different times
, Econ final most important stuff
Calculating opportunity cost:
/ upwards sloping
= for every bulldozer you have to give up two pizzas
200/100 =2 Y/x
Supply and demand model:
A demand curve shows the quantity demanded at various prices
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