Econ 2010 1st Edition Lecture 2 Outline of Last Lecture I. Course ObjectiveII. Microeconomics vs. MacroeconomicsIII. Course PhilosophyIV. Course OutlineOutline of Current Lecture I. Ten Big IdeasII. Social ScienceIII. Quantitative PredictionsCurrent LectureI. Ten Big Ideas for Beyond the Final0. Things are scarce.Everybody cannot get everything that they want. Even though people’s wants are unlimited, resources are limited.1. (Because resources are limited) People face trade-offs.To get something, you have to give up (trade-off) something. For example, time is limited: To go swimming more, you have to give up (trade off) climbing...To work on econ more, you have to give up (trade off) going to the movies.2. Opportunity cost is the cost of something that you have to give up.For example, the cost of CU education:If an out of state student decides to go to CU over their own state universityCU out of state tuition: $60,000Alternative in state tuition: -$20,000Opportunity Cost: $40,0003. When making decisions, it is useful to think “at the margin.”You don’t have to decide between “never eat out” and “always eat out,” but “do I want to eat out one more time?”These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.You don’t have to decide between “never work on econ” and “always work on econ,” but “do I want to work on econ one more hour?”4. People respond to price changes.To get someone to stop doing something, they need a price incentive.For example, to get less people to use the Boulder turnpike to reduce traffic, broadcasting trafficand other broadcast appeals have proven to be ineffective; however, adding a toll booth would effectively make a portion of the drivers take another route.5. Trade can make everybody better off.Japan makes great cars that the US wants. The US makes great software that Japan wants.If they chose to trade, both would get what they wanted and could feel great. Japan did not have to trade cars for software, but chose to. The US did not have to trade software for care, butchose to. Trade makes everybody a winner.6. Markets with many buyers and many sellers are a “good” way to organize economic activity.Denver rental market vs. New York City.New York City has many buyers and sellers keeping prices competitive and products quality.Denver rental market is fairly closed off and can sell at any price they want as long as it isn’t noticeably ridiculous.7. Government can sometimes improve on the market outcome.The government can step in when there are equity concerns: if the market gives too much to one group and not enough to another. It can also step in when the market power is unevenly distributed: there are only a few sellers. The government will also step in in a case pf externality:smoke, there is no more market.*Please note that the last 3 ideas relate to macro not micro8. Conceptual difference between benefit of a good and its price.1st day skiing at Winter Park: There is the benefit of how much better you feel: “I feel like $100,” and that is for the price: howmuch you have to pay, in this case around $50.9. Production and consumption decisions coordinated through prices.High performance electric cars use Lithium batteries. These electric cars are slowly becoming more and more popular and prevalent. How does Bolivia know to mine more Lithium? Price for Lithium rises along with the demand.10. Economics is about predictions – guessing the future.For instance, what would happen if… Microsoft broke into 2 firms?II. Social ScienceWhy is economics a social science?Social: about peopleScience: about quantitative predictionsEconomics makes quantitative predictions about people and the real world.III. Quantitative PredictionsUse theories or modelsIt is important to start by simplifying to the most important points, tell us what we really need to know. The model is not a real thing, but a good representation of a real thing. It contains 90%truth.For example, a map is not a real thing, but it is a representation of a real thing (streets). The map may suggest 105 miles, when in reality that specific route is 111 miles. It is technically “inaccurate,” but it tells us what we need to know and is fairly close to the truth.Testing: How good of a representation of the real thing is it? Do we believe that it makes god predictions? Has it made good predictions in the past? If we do not know, we can do an