Economics 200 1st Day 09 24 2013 Economics How society manages scarce resources o People spending decisions o Firms what to charge o Society policy decisions Microeconomics Blended Learning How households firms make decisions and interact Improve large learning Utilizes online Online lessens before class o 5 10 min o Online problem sets Clickers needed Grades Exams o 1st 25 Oct 8th o 2nd 25 Nov 19th o Final 30 Cumulative Dec 16th 8am Clicker Points o Clickers umd edu o 10 o Correct answers 1 pt o Incorrect answers pt o Lowest 3 days dropped o Points posted on ELMS on Fridays Problem Sets o 10 o Aplia o 10 graded 1 non graded activity o Access to problem sets aplia Course Website Elms umd edu How to Succeed Visit course website Come to class Print out syllabus Emails Subject Econ 200 always moody econ umd edu hayek econ umd edu Video Principles of Microeconomics 09 24 2013 Principles of Microeconomics Time is money No such thing as a free lunch Scarcity o Limited resources 4 principles o 1 All decisions involve tradeoffs o 2 Cost Give up to get Opportunity Cost o 3 Rational decision Making At margin o 4 People respond to incentives Principle 1 Rational Principle 2 Opportunity cost o Evaluate pros benefits cons costs o Any item is whatever s given up to obtain it o What you give up what you get Principle 3 Thinking at the margin Marginal changes Principle 4 Incentives Influences decision making Principle 5 10 Principal 5 09 24 2013 Trade can make everyone better off Trades beneficial for both sides Allows countries to specialize Principle 6 Principle 7 Principle 8 Markets are good way to organize economic activity Market economy Households firms in power Government s can sometimes improve market outcomes Laws regulations incentives Enforce property rights Country s standard of living relies on its ability to provide goods services Productivity is key o Increases living standards Principle 9 Inflation o Government prints too much prices rise 1920s o Growth in quantity of money Principle 10 unemployment Society faces a short run trade off between inflation o Increased amount of stimulates economies overall level o Higher demand over time cause firms to raise prices hire of spending more workers o More hiring lower unemployment o Business Cycle Irregular highly unpredictable fluctuations in economic activity measured by production of goods and services Chapter 2 Scientific Method 09 24 2013 Observation theory and more observation Pay attention to natural experiments offered by history Role Assumptions Simplify the complex world Easier to understand Allows focus to solve problems Economic Models Composed of diagrams and equations Circular Flow Diagram Model shows how dollars flow through markets among households Production Possibilities Frontier Shows various combinations of output Macro Micro Micro Macro o How households and firms make decisions interact o Economy wide phenomena Positive vs Normative Analysis Positive Normative o Descriptive make a claim how it is o Prescriptive how it ought to be Economists in DC Since 1946 have advised President on economy Why Advice is not Always Taken Several different advisors in different areas take a look at advice and comment on it as well o Communications press legal etc Why Economists Disagree The validity of a alternative positive theories Different values normative views on policies Different scientific judgment Perception vs reality Themes of MicroEconomics 09 24 2013 Themes of MicroEconomics Scarcity Decision making principles Thinking like an economist Markets Scarcity Nature of limited resources Heart of economics Leads to need of decision making Never enough of everything to please everyone Decision Making Principle 1 o Trade Offs Occurs in every choice Evaluate pros cons Principle 2 o Opportunity Cost Item is worth what s given up to obtain it o Total cost INCLUDES Opp Cost o Revealed Preference Choice taken outweighs Opp Cost Rational Decision Maker Only takes action if benefits exceed costs Thinking at the Margin Evaluate marginal costs marginal benefits Sunk Cost Cost that been committed cannot be refunded Thinking at margin means ignoring sunk cost What if Cost or Benefit Changes Action likely to change Incentive o Reward or Punishment Principle 4 o People respond to incentives Question 1 000 repairs 600 on new transmission 6 500 w new transmission 5 700 w o new transmission o Marginal Cost 600 o 6 500 5 700 800 o Repair Transmission YES Fundamental Questions What to produce How to produce Who gets it Market Economy Economy that allocates resources through decentralized decisions of firms households as they interact in markets for goods services Supply Demand 09 24 2013 o Group of buyers and sellers of a particular good or Market for Goods Services Market service Buyers demand Sellers supply Competitive Market Determinants of Demand Price of Product demanded o Called Law of Demand Example Market for Lattes Use demand schedule Market in which they re many buyers and many sellers so that each has a negligible impact on market price o Negative correlation between price and quantity o Dependent variable on horizontal independent variable on vertical Supply Behavior of sellers Quantity supplied of any good is amount sellers are able willing to sell Determinants of Supply Price of product Price of other goods Price of inputs goods used to make the product Technology machines used in production Shows relationship between price able to sell good at and Supply Schedule quantity supplied Law of Supply Quantity supplied rises when price rises Positive relationship Market Supply Add up individual supplies Supply Demand Together Equilibrium price is where quantity supplied meets quantity demanded Demand vs Quantity Demanded QD Demand o Tastes o Income o of buyers o Price of related goods o Expectations Quantity Demanded o Refers to 1 pt on demand curve o Change in price changes QD NOT DEMAND Surplus Shortage Quantity supplied quantity demanded Facing surplus sellers will cut price to increase sales o Price continues to fall until equilibrium is reached Quantity demanded quantity supplied Sellers raise price Prices rise until market reaches equilibrium Law of Supply Demand Claim that price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance How to Analyze Change in Equilibrium Decide whether shift was in supply or demand Decide which direction the curve shifts Use supply and demand diagram
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