¿Que Es economía?

Q'est ce que c'est l 'économie?

What is economics?



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Do we have enough resources for everybody in the world?

Resources can be in the scientific way, but at the same time it can mean anything that we want, or need. The only problem is that there may not be enough resources in our society for all of us. This 'lack' is called a scarcity!

Q) Why are we talking about resources first? This is supposed to be economics!

A) Well, that is because economics is the study of how a community/society/group manages its 'lack' of resources.




[Vocab Note]

Scarcity: inevitable lack of resources in our community

Economic: study of how a community/society/group manages its 'lack' of resources



How Do People Make Decisions?

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Economy was part of everybody's lives since they were born. Because behavior of economy reflects the behavior of the people, we have to start off by studying the principles of people's decision making.


Principle 1: People Face Trade-Offs

To receive one thing we like, we have to give up another thing that we like.

Consider it this way-
Answer these two Questions:
Do you like money?
If you have hundred billion dollars and you are able to buy anything you want, what would it be?

To buy a thing that you want, you would need to give up your money to by that 'good.' But if you buy that good with your money, you can not spend that money on something else.

"I want to buy a porsche, but if I buy that I can not buy a nice house in France with jacuzzi."

If I decided to buy a porcshe, I would have to give up my house in France with Jacuzzi. If I buy a house in France with jacuzzi, I can not buy my porsche!

Another trade-offs that people deal with is between efficiency and equity.

Efficiency is when the society/ community/ group gets the most benefit out of what they have- 'scarce resources'-'goods' and equity means that these scarce resources are divided and given equally, fairly amoung the people of that system.



[Vocab Note]

Efficiency: a community/ society/ group getting as much as possible from what they have

Equity: Fairly dividing what we have




Principle 2: The cost of Something is what you give up to get it.


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Making decisions involve in comparing goods by looking at how much they cost, and the benefits of the certain good.

Lets go back to the example from principle 1:

"I want a porsche, and I want a nice house in France with jacuzzi." Now, how do I choose what I am going to buy between the two?

I would look at the benefit and cost of both items:


I don't have a car, and I need one to drive through the country. Also if I have a car I get to travel here and there. The gas price went up, so I am not to sure it is a good idea to buy a car. But then, I heard that in couple of years, porsche is going to raise their price.

I go to France for my vacation every holidays, and I need a place to stay because I always stay at a hotel. May be it is cheaper in the long run to buy a house, and while I am not there I can lend it on someone else. I will be able to make some money too.


either way, I would have to give up either of the items. And this is the opportunity cost.
Opportunity cost is whatever you must give up to win the other good.


If I choose to buy the house, my opportunity cost would be the porsche.

If I choose to buy the porsche, my opportunity cost would be the house.




[Vocab Note]

opportunity cost: whatever you must give up to get the other good




Principle 3: Rational People think at the Margin

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Rational people are the basis of economy. Rational people systematically and purposefully do their best to win whatever it is that they want.

Example-

Rational People:

"I want a house and I am low around hundred bucks, I am going to work for another few days to earn that and buy a house!"



Un-rational People:

"I want a house and I am low around hundred bucks, I am going to go to a casino and gamble to earn that hundred bucks!"



And this is when marginal changes come in, it is small adjustments to plan the deed


Example -


"I want a house and I am low around hundred bucks, I am going to work for another few days to earn that and buy a house! I was going to go on a vacation, but I guess that can wait for another few days."


you are changing your plan to pursuit your goal, or that "good"

Also, rational people base their decisions on marginal costs, and marginal benefits.

The book gives an example of plane seats.

In that, the marginal cost is a can of soda, and a bag of penuts that the passenger will consume. As long as the passengers pays more than the marginal cost, selling the plane ticket is profitable.

The marginal benefit is for that extra amount you would pay (time,money...) for a certain good.




[Vocab Note]

Rational people: people who systematically and purposefully do their best to achieve their goal

Margianl changes: small adjustments to plan an action (in pursuit of something, usually)



Principle 4:People Respond to Incentives

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Incentives induces people to act. Incentives can be either reward, or punishment that affect the result of the rational people's decisions.

This can have a very direct effects, but also there can be a less obvious effects that work through incentives.



[Vocab Note]

Incentives: something that induces people to act




Principle 5:

Trade can Make Everyone better off


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Trading can make many people better off. By sharing work and sharing the outcome, you may have saved time, or worked less!

If I can only make penut butter ice cream, and Aless can only make strawberry cheesecake ice cream, then by trading, Aless and I can taste both types of ice cream.

If Juliana decides to buy the porshe, and I decide to buy the house in France with jacuzzi, then we may want to trade to provide each other's lacks




Principle 6: Markets are usually a good way to organize Economic Activity



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Market economy is contolled mostly by the demanders and sellers, Firms decide who to hire, and what to make, whereas the households decide which firms to work in and what to buy with their incomes. None of us are just firms, or just households. Each one of us can be the firms, or the housholds - the demaders, and the suppliers. Adam Smith made a famous theory based on the observation of market economy that there is an "invisible hand" that influences that market. The "invisible hand" will bring back up, or back down the price to equilibrium price/quantity.



[Vocab Note]

Market economy: it is an economy that is mostly controlled by the firms and households as the two interact for trade




Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment


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Quick Quiz:

True or False?

1) Inflation always has a negative effect

2) Inflation is bad for unemployers


Actually, although it is famous for being a bad boy, inflation can have some positive impact in the short-run. How??ro

This is logic ready?

  • If the money price of all goods and services increase...

  • There will be an increase of price in companies, firms...

  • Because it is all very expensive, the companies will have to more goods

  • And that would be that they will increase the production, which will result in hiring more workers

  • More hiring means lower unemployment!




So what are the answers? They are actually both false.

These fluctuations are called the buisness cycle.

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[Vocab Note]

Buisness cycle: fluctuations in economic activity

Questions:

Which of the following is not one of the characteristics of a market economy that helps produce spontaneous self-organization?

a)
Individuals pursue their own self-interest, buying and selling what seems best for themselves and their families.

b)
People respond to financial incentives.

c)
Prices are set in open markets in which suppliers compete to sell to potential buyers.

d)
Economic transactions are governed by a legal structure, which enforces contracts and property rights, and is largely created and administered by the government.

e)
Firms are guided by the central government in deciding what to produce.


Answer: E

Government policies designed to promote efficiency:

a. tend to cause the economy to grow more slowly.
b. usually do so at the expense of equity.
c. always fail.
d. require very high taxes.

Answer: B

'Economics is everything about money.' Comment on this statement.



Answer: "The nature and scope of economics extends well beyond money, embracing a range of resource allocation problems that confront individuals, households, and governments."



Sources: Are all stated above, once you click on each item.
Textbook: Principles of Microeconomics by N. Gregory Mankiw
http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=9780324319163&discipline_number=413
http://www.oup.com/uk/orc/bin/9780199286416/01student/questions/lipsey_student_ch01/page_01.htm