Econ 4.3

Monday, January 18, 1999
Announcements: Complete #1, 3, 5 from Chapter 2. The problem set is due on Friday 1/22. .

Lecture notes:  

Chapter 1 (cont'd)

• Positive economics is an approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what exists and how it works. It is a description of something that can be agreed upon.
• Normative Economics is an approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.
• Forecast -- inflation, employment, foreign exchange

Chapter 2: Scarcity and Choice

• The Three Basic Questions For All Economies (all societies must answer three basic questions)
• 1. What mix of products should be produced (goods and services) and how much?
  • Free Market Economy -- absence of market plan
  • Consumer Sovereignty -- the idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase)
• 2. How will it be produced?
  • Technological issue
• 3. Distribution -- who gets the product that is produced?

• Free Market deteremined by individuals selling scarce resources they own and with the income they can buy the products
• Because people won't voluntarily give money the government steps in and taxes

• Production Possibilities Frontier -- illustrates the principles of constrained choice, opportunity cost and scarcity. It shows what is possible and what isn't