HSS646 Principles of Economics

2022-01-13

Economic Agents

• Agent is Rational
• Tradeofs are made within budget to maximize utility3

Optimization

• Trade offs become difficult
• We tend to focus on best alternative reality. It is referred to this alternative activity as the opportunity cost (loss of other alternatives)
• Optimizer is effectively giving up when s/he surfs the Web.
• Compare a set of feasible alternatives and pick the best one
• Cost-benefit analysis
• Free Rider Problem - do not contribute, but still benefit from the investments others make

Markets

• Markets are insti

Scarcity and Efficiency

• Limited resources
• Economic efficienct requires to produce highest combination of quantity and quality given resource scarcity
• Ecnomy is producing efficiently when no individual’s economic welfare or outcome can be imposed without another being worse off

Production Possibilty frontier

Types of economy

• Market economy - Free market
• Command economy - Authoritarianism,
• Mixed economy

Types of Market

In order of competition

• Perfect
• Monopolistic
• Oligopoly
• Monopoly

Distinction based on-

• Number of firms competing
• Products are differentiated or not
• entry/exit from market is easy
• amount of information available to market

10 Principles of Economics

1. Tradeof
2. Opportunity cost
3. Rationality
4. Incentive
5. Trade and exchange
6. Market - place to organize economic activity
7. Government
8. Productivity
9. Price level stability
10. Business cycle (inflation and unemployment)