Jay Tacy

Microeconomics

Chapter 1 Summary

Economics is not a study of things, money, or wealth but of people. Scarcity is one of the defining concepts of economics. Scarcity is a situation in which there not enough resources to meet all of everyone’s wants. Economics is the social science that seeks to understand the choices people make in using scarce resources to meet their wants.

One of the first choices that needs to be made is deciding what to produce. There are three factors of production: labor, capital, and natural resources. Labor includes anything done by people with their hands or minds. Natural resources includes anything that is in its natural state. For example, coal, mineral deposits, farmland, rivers. Capital is all the productive inputs created by people like tools, machinery, buildings, and intangible things like computer software. When producing something it will require resources, labor and capital. If you choose to use the resources to make a car, you cannot use the exact same resource to build a school. This is opportunity cost. Opportunity Cost is the cost of a good or service in terms of the forgone opportunity to pursue the best possible alternative activity with the same time or resources. It is easiest to define opportunity cost with two goods. For example, in a two good economy, you would compare how many cars you could have produced with the same amount of labor, capital, and natural resources it took to produce a college graduate. I never thought about how the money my mom and dad spend on my education could be being spent elsewhere. My mom could probably have a much nicer car, but she chooses to spend her resources on my brothers and sisters and my education.

A second basic economic choice is how to produce something. For example, you could teach a class in a classroom to just a few students or you could teach to hundreds online. Efficiency is means producing something with a minimum of expense, labor and waste. Economic Efficiency- is a state of affairs in which it is impossible to make any changes that satisfies one person’s wants more fully without causing some other persons wants to be satisfied less fully. For example, I have a mixer and you need a mixer. It is most efficient if I let you use my mixer rather than have you go and buy a new mixer. Economic Efficiency in production is when given available knowledge and productive resources, to produce more of one good without foregoing the opportunity to produce some other good. For example, an apple grower finds that at a certain point overwatering does not increase his apple crop. He would be smart to use the extra water to water his peaches to increase that crop.

Once you are producing a product efficiently, then you can look at increasing product potential only by giving up the opportunity to produce something else. Investment can increase the stock of capital. Those things made by people. Increasing quantities of labor, capital, and natural resources is not the only way to have economic growth. We can also have new knowledge. Entrepreneurship is the process for looking for new possibilities. Entrepreneurship is not always starting a new business. It could be just finding a new market, it involves looking outside the box.

Deciding who will do which work is another economic choice. This is called division of labor. Economists have long argued about specialization and cooperation. In cooperation you need teamwork, learning by doing and comparative advantage. Comparative advantage is the ability to do something at a relatively lower opportunity cost than someone else. With comparative advantage work is analyzed and then completed according to what balance will result in the most work completed.

Lastly you have to decide for who the goods will be produced. When a set number of goods are produced you can improve distribution by allowing trade. This is efficiency in distribution. For example, you have 10 sack lunches. Half are peanut butter and jelly, and the other half ham sandwiches. After you pass them out, students can choose to trade or not to get what they want. This way the most people will have their wants satisfied. When distributing goods it is important to consider fairness also. In fairness the concept follows that all people are deserving of part of the goods.

After producing goods we need to coordinate choices. This can be done in two ways. Hierarchy- is a way of achieving coordination in which individual actions are guided by instructions from a central authority. Choices can also be coordinated by spontaneous order- is a way of achieving coordination in which individuals adjust their actions in response to cues from their immediate environment.