Econ 104 1st Edition Lecture 2 Outline of Last Lecture I This is macroeconomics II Current Macroeconomic Challenges of Washington D C III Other examples of Macro Questions Outline of Current Lecture II Three Key Economic Ideas III Why economics IV The Index of Economic Freedom V Types of Economics Models and Analysis Current Lecture I Three Key Economic Ideas a About how people makes choices in markets i People are rational 1 They will try and make the best decisions for themselves 2 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 before ii EXPOST value after iii 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 incentives 1 EX Why don t buses take a shortcut to stay on schedule a Well it depends on how they are paid i Paid 25 hr 1 Don t care where they go or how good they are ii Paid 1 passenger 1 Want to take an efficient route to pick up the max amount of passengers iii Optimal decisions are made at the margin 1 Cost benefit analysis 2 Marginal Cost vs Marginal Benefit 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 3 EX an airline allows standby passengers to fly anywhere for 99 a If there are 200 seats on a plane and 10 empty seats and it costs the airline 100k to fly the plane this trip i 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 anyway iii The Marginal benefit is 99 II III Why economics a Economics is derived from the need to make choices b There are scarce resources and unlimited wants and this forces us to make CHOICES c Unlimited Wants i Has to do with improving our standard of living 1 Standard of living the amount of goods and services we can buy ii To produce more goods and services society needs resources which are scarce d Scarce Resources i Factors of Production 1 Land a Water oil natural resources 2 Labor 3 Capital a Human i Accumulated training and skills of workers b Physical i Machines factory computers 4 Entrepreneurship a Organizes and operates a business i Takes a big risk doing this e 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 economy The Index of Economic Freedom a Shows how economically free a country is and is based on i Size of government ii Legal system and property rights iii Sound money value of currency iv Freedom to trade internationally v Regulation b United States is 12 IV c North Korea is most oppressed Types of Economics Models and Analysis a Model a simplified description of reality i 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 phenomena i Countries with the most economic freedom have the highest GDP per capita c Positive versus Normative Economics i 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 use 2 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 untestable 1 People disagree because opinions are based upon personal values and political views 2 EX economic analysis as shown that the minimum wage law is a bad idea because it causes unemployment iii EXAMPLES of positive and normative economics 1 A 50 cent per pack tax on cigarettes will lead to a 12 percent reduction in smoking a Positive 2 The federal government should spend more money on AIDS research a Normative 3 Rising paper prices will increase textbook prices a Positive