Econ 104 1st Edition Lecture 2Outline of Last Lecture I. This is macroeconomicsII. Current Macroeconomic Challenges of Washington, D.CIII. Other examples of Macro QuestionsOutline of Current Lecture II. Three Key Economic IdeasIII. Why economics?IV. The Index of Economic Freedom V. Types of Economics Models and Analysis Current LectureI. Three Key Economic Ideasa. About how people makes choices in marketsi. People are rational1. They will try and make the best decisions for themselves2. Rationality means people take into account all available in achieving their goals. a. EX: maybe you want to go see a movie that costs $7 i. EXANTE: value beforeii. EXPOST: value afteriii. The value before the movie will be more than $7 if you went to see the movie. However, the value might not be $7 after (retrospective)ii. People respond to economic incentives1. EX: Why don’t buses take a shortcut to stay on schedule?a. Well it depends on how they are paidi. Paid $25/hr1. Don’t care where they go or how good they areii. Paid $1/passenger1. Want to take an efficient route to pick up the max amount of passengersiii. Optimal decisions are made at the margin. 1. Cost-benefit analysis2. Marginal Cost vs Marginal BenefitThese 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.3. EX: an airline allows standby passengers to fly anywhere for $99a. If there are 200 seats on a plane and 10 empty seats and it costs the airline 100k to fly the plane this tripi. Then the average cost per passenger is 100k/200=500.ii. The Marginal cost of flying the standby passengers is $0 because the plane will fly anywayiii. The Marginal benefit is $99II. Why economics?a. Economics is derived from the need to make choicesb. There are scarce resources and unlimited wants and this forces us to make CHOICESc. Unlimited Wantsi. Has to do with improving our standard of living1. Standard of living: the amount of goods and services we can buyii. To produce more goods and services, society needs resources which are scarce. d. Scarce Resourcesi. Factors of Production1. Landa. Water, oil, natural resources2. Labor3. Capital a. Human i. Accumulated training and skills of workers…b. Physicali. Machines, factory computers…4. Entrepreneurshipa. Organizes and operates a businessi. Takes a big risk doing thise. What are the choices we have to make?i. What good and services to produce?ii. How will goods and services be produced?iii. Who decides? Mixed economy vs command economy vs free market economyIII. The Index of Economic Freedom a. Shows how economically free a country is and is based on:i. Size of governmentii. Legal system and property rightsiii. Sound money: ‘value of currency’iv. Freedom to trade internationallyv. Regulationb. United States is #12c. North Korea is most oppressedIV. Types of Economics Models and Analysis a. Model: a simplified description of realityi. Makes predications that can be tested with data. b. Theory: a well-substantiated explanation of some aspect of the natural world; an organized system of accepted knowledge that applies in a variety of circumstances to explain a specific set of phenomenai. Countries with the most economic freedom have the highest GDP per capita. c. Positive versus Normative Economicsi. Positive: statements that can be certified and tested scientifically using real world data and economic models. 1. There is a discrepancy on what model to use2. EX: “if we raise the minimum wage, unemployment will increase” but you can also say the opposite based on a different model. ii. Normative Economics: statements are based upon opinion and are scientifically untestable1. People disagree because opinions are based upon personal values and political views2. EX: “economic analysis as shown that the minimum wage law is a bad idea because it causes unemployment.”iii. EXAMPLES of positive and normative economics1. A 50 cent per pack tax on cigarettes will lead to a 12 percent reduction in smokinga. Positive2. The federal government should spend more money on AIDS researcha. Normative3. Rising paper prices will increase textbook pricesa.