The aggregate demand/ aggregate supply models

POWER OF MARKETS- EXCHANGE

Now we will transition from the more mathematical points of economics to the more philosophical points of economics. These include more basic principles of economics as well as somethings people will do as far as the subject goes. 

• Capitilism is when the market aligns incentives in such a way that individuals working for their own best interest trying to make better standing of living in society. 
• Stores sell products that people want to buy, companies provide products stores want to sell.
• "Economy is the art of making the most of life" 
• Luxury good- a good that we buy in increasing quantities as we grow richer
• Economists often argue that rich countries ought to pay poor countries to protect natural resources that have global value. 
• It is bad to impose our own preferences on those who are less fortunate.
• Maximize utility, the more you waste the higher the disutility
• Balance work and leisure
• Life is about trade off and so is economics
• Nothing is free you just pay using either methods such as time (so true)
• Firms MUST decide what to produce, how and where to make it, and at what price
• People will go where they are paid more (again very true)
• If more people buy a product, that same product will gain higher production
• Profit opportunities attract firms
• Talent helps business
• Firms- can be anything from one guy selling to a corporation to someone combining input to make value.

TRADE

• Absolute advantage: The capability to produce more of a given product using less of a given resource than a competing entity.
• comparative advantage: The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.
• Whenever a country has a comparative advantage in production it can benefit from specialization and trade. However, specialization can have both positive and negative effects on a nation’s economy. The effects of specialization (and trade) include:
  • Greater efficiency: Countries specialize in areas that they are naturally good at and also benefit from increasing returns to scale for the production of these goods. They benefit from when the average cost of producing the good falls (to a certain point) because more goods are being produced. Similarly, countries can benefit from increased learning. They simply are more skilled at making the product because they have specialized in it. These effects both contribute to increased overall efficiency for countries. Countries become better at making the product they specialize in.
  • Consumer benefits: Specialization means that the opportunity cost of production is lower, which means that globally more goods are produced and prices are lower. Consumers benefit from these lower prices and greater quantity of goods.
  • Gains from trade: Suppose that Britain and Portugal each produce wine and cloth. Britain has a comparative advantage in cloth and Portugal in wine. By specializing and then trading, Britain can get a unit of wine for only 100 units of labor by trading cloth for labor instead of taking 110 units of labor to produce the wine itself (assuming the price of Cloth to Wine is 1). Similarly, Portugal can specialize in wine and get a unit of cloth for only 80 units of labor by trading, instead of the 90 units of labor it would take to produce the cloth domestically. Each country will continue to trade until the price equals the opportunity cost, at which point it will decide to just produce the other good domestically instead of trading. Thus (in this example with no trade costs) both countries benefit from specializing and then trading.
  Of course, there are also some potential downsides to specialization:
• Risk of over-specialization: Global demand may shift, so that there is no longer demand for the good or service produced by a country. For example, the global demand for rubber has fallen due the the availability of synthetic substitutes. Countries may experience high levels of persistent structural unemployment and low GPD because demand for their products has fallen.
• Strategic vulnerability: Relying on another country for vital resources makes a country dependent on that country. Political or economic changes in the second country may impact the supply of goods or services available to the first.