* Trade can but not guarantee to make everyone better off. It allows people to specialize in what they are best at. Ex: Music industry- artist creating/ performing music. Has a producer/technician to help him record music. Record label helps promotion/selling. His manager helps with tours. Apple helps with iPod/iPhone.
Markets are usually a good way to organize activity. Market economy: allocates resources through decentralized decisions of many individual households and firms. Idea came from Adam Smith in the “Wealth of Nations.” Talked about the invisible hand, which talks about how the price is a transmission mechanism.
Government can sometimes improve economic outcomes. Government has to establish and enforce property rights: ability of an individual to own and exercise control over scarce resources. Has to also adjust market failure: situation where market left on its own will fail to produce an efficient outcome. Market power: ability of single economic actor (small group) to have significant influence over market price. Externality: impact of an individual’s decisions on well being of a bystander.
Equality is a different goal than efficiency.
Thinking like an economist: known as a social science, scientific method: dispassionate development and testing of theories about how the world works. Economics focuses on natural experiments and data analysis. Ex: Impact of legal threats on P2P file sharing, impact of P2P file sharing on music sales.
Role of assumptions: allow you to simplify the model/analysis. Assumptions we make must be reasonable.
Economic model: simplified view of reality that retains key features and interactions to be studied similar to a road map- leaves out details but gives you key features. Ex: circular flow diagram (Music industry) shows that there is a market for goods, market for factors of production, households, and firms.
Example: production possibility frontier (PPF)- graph that shows various combinations of output given...