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A-State ECON 2313 - Lecture Notes

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ECON 2313: Fall , 2011Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Economics: The Big QuestionsEconomic ResourcesLand or natural resourcesLabor or “human resources”Capital or “manmade instruments of production”Human CapitalEntrepreneurshipWhat, How, For Whom?How to produce?Slide 17Slide 18Slide 19Slide 20When is the Pursuit of Self-Interest in the Social Interest?MicroeconomicsMacroeconomicsMacroeconomic QuestionsThe Standard of LivingThe Cost of LivingThe Business CycleSlide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Ceteris ParibusSlide 43Slide 44Correlation versus CausationSlide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52TechnologySlide 54Important technical innovationsSlide 56Slide 57Slide 58Slide 59Slide 60Slide 61ECON 2313: Fall , 2011Welcome!What is economics?Economics is the studyof how individuals andsocieties allocatescarce resources among(competing) alternativeuses.Scarcity Available resources are insufficient to satisfy wants.We cannot produce enough goods and services to satisfy everyone—we don’t have the resources!Congress made supplemental appropriations for the Iraq effort of $110 billion June 2003 and March 2004. We should ask the question: what could we have for $110 billion?•628 Boeing 7E7 Aircraft• Construct three (3) 700 mile bullet trains (includes the cost of inner-city land acquisition). •4,075 “high quality” educational facilities to accommodate 1,000 students.•Write a $379 check to every U.S. citizen.•Fund 1,000 universities the size of Arkansas State for one year. What can you buy for $110 billion?Economics Webster’s Ninth New Collegiate Dictionary. eco• nom • ic 1. archaic: of or relating to a household or its management. eco = oikos, meaning “house” or “household” nom = nemein, meaning “to manage” ic = ic, mean “of” or “relating to”The geneology of economicsFinley. The World of Odysseus.LO1The Economic Perspective•Thinking like an economist•Key features:•Scarcity and choice•Purposeful behavior•Marginal analysis1-7Economics: The Big Questions•How do choices end up determining what, how, and for whom goods and services are produced?•When do choices made in the pursuit of self-interest also promote the social interest?Economic Resources•Land•Labor •Capital•Entrepreneurship Things that give us the physical means to produce and distribute goods and services.Land or natural resourcesLabor or “human resources”Capital or “manmade instruments of production”Human CapitalHuman capital is the knowledge and skill people obtain from education, on-the-job training, and work experience.Entrepreneurship Entrepreneurship is the willingness and ability to combine land, labor and capital into productive enterprises.•Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage.•Entrepreneurs have a key role in the commercialization of new knowledge•Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.What, How, For Whom?Because resources are scarce, growing more corn means growing less wheat, building more SUV’s means building fewer military vehicles, and building more prisons means we have to sacrifice something else—like new schools.How to produce?•In France, basket-carrying workers pick the grape crop by hand. Grape picking in California is often mechanized.•GM uses workers to weld body parts together in some plants and uses robots in others.Source: Bureau of Labor Statistics 2005 Occupational SurveyFor whom are goods produced?The personal distribution of income describes the distribution of income among households or individuals1967 1990 2008024681012Household Income Ratios of Selected Percentiles, the United States 90th/10th80th/50thYearRatioSource: Bureau of the Census1967 1990 20080102030405060Shares of Household Income Quintiles,the United StatesLowestSecondMiddleFourthHighestYearShare (Percent)Source: Bureau of the CensusWhen is the Pursuit of Self-Interest in the Social Interest?•Subprime mortgage brokers and underwriters behaved in their own interests—but contributed to the housing prices bust.•BP scrimped on deep water drilling safety measures—with catastrophic results.•Farmers on the high plains draw from the Ogallala Aquifer—but the water is rapidly running out.MicroeconomicsThe study of the choices that individuals and businesses make and the way these choices respond to incentives, interact, and are influenced by government Examples of microeconomic questions?•What determines the price of gasoline?•Why is housing so much more expensive in San Francisco compared to Dallas?•Will more students enroll in nursing schools in response to rising incomes of nurses?•Will the “free” availability of Linux affect sales of Windows?Macroeconomics The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.Macroeconomic Questions•The standard of living•The cost of living•Economic fluctuations—recessions and expansionsThe Standard of Living The standard of living is (imperfectly) measured by the average quantity of goods and services per person (or per capita).Issues:•How to explain changes over time in the standard of living?•How to explain cross-national differences in the standard of living?The Cost of Living The cost of living refers to the prices of goods and services that are typically purchased by households.Issues:•How to explain changes over time in the cost of living?•How to explain cross-national differences in the cost of living?The Business CycleThe term business cycle is used to describe observed fluctuations in key macroeconomic measures such as real GDP, personal income, profits, or employment.A full cycle consists of an expansion and a contraction (or recession). Business cycles are recurring phenomena; however, they are irregularly recurring.TimeReal GDPTotal ProductionYearBusiness Cycle Phases and Turning PointsExpansionExpansionPeakPeakRecessionRecessionTrough2 4 8USA Employment is down 7.7 million since December 2007Recessions shaded pinkLO1Purposeful Behavior•Rational self-interest•Individuals and utility•Firms and profit•Desired outcomes1-31Economists assume that economic decision-makers are rational and engage in purposeful,


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