The Scope and Method of Economics 10 24 2012 Economics the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided Opportunity Cost the best alternative that we forgo or give up when we make a choice or a decision Trade Offs What you are giving up when making a decision Scarce Limited Exp Time 24 hours in a day Marginalism the process of analyzing the additional or incremental costs or benefits arising from a choice or decision Sunk Cost Costs that cannot be avoided because they have already been incurred original investments to create something Exp Developing a program cost a lot of money however selling the disc once it is created is cheap The sunk cost is the money spent on developing the program Efficient Market a market in which profit opportunities are eliminated almost instantaneously Industrial Revolution New technology in Europe in the late 18th century and early 19th century caused economic growth and people to move into cities from the rural areas New technology transportation Microeconomics branch of econ That examines the functioning of individual industries and the behavior of individual decision making units firms and individual households Macroeconomics The branch of econ that examines the economic behavior of aggregates income employment output etc on a national scale Micro Production How much steel needed Prices Price of gas Macro GDP Inflation Consumer prices Income Minimum Wage Salaries Total wages and salaries Employment Jobs in certain industry Unemploymen t rate Positive Economics an approach to economics that seeks to understand behavior and the operation of systems without making judgments Its describes what exists and how it works Ex What determines the wage rates of unskilled workers Divided Into 2 Parts Descriptive Economics data that describes phenomena and facts Economic Theory a statement or set of related statements about cause and effect action and reaction Ex When prices fall people tend to buy more when prices rise people buy less Normative Economics Policy Economics approach to economics that analyzes outcomes of economic behavior evaluates them as good or bad and may prescribe courses of action Ex Should the government subsidize higher education or regulate cost of higher education Model Formal statement of a theory usually mathematical statement of a presumed relationship between two or more variables Variable A measure that can change from observation to observation Ockham s Razor Principle that all irrelevant detail should be cut away Ceteris Paribus All Else is Equal A device used to analyze two variables while all others remain unchanged Ex If the price of gas changes how will that effect how much people drive assuming all else is constant Post Hoc Ergo Propter Hoc Common error If event A happened before event B it is not necessarily true that event A caused event B Fallacy of Composition to conclude that if something is true for one thing it is true for all or a whole Empirical Economics The use of data to test economic theory Economic Policy 4 criteria applied to judging economic outcomes Efficiency allocative efficiency economy is one that produces what people want at the least possible cost Equity fairness Growth an increase in the total output of an economy Stability a condition in which national output is growing steadily with low inflation and full employment of resources CHAPTER 1 Slope measure indication whether the relationship between variables is positive or negative and how much of a response there is in Y when X changes Slope Y X Y2 Y1 X2 X1 Positive negative relationship Positive negative slope Change in variable Economic Problem Scarcity and Choice 10 24 2012 Three Basic Questions What gets produced How is it produced Who gets what is produced When a society consists of more than one person questions of distribution and specialization arise Capital Things that are produced and then used in production of other goods and services Ex Buildings Offices Equipment etc Human Capital Training Education etc to better an employee Factors of production Land Labor Capital Production The process that transforms scarce resources into useful goods and services Inputs Resources Anything by nature or previous generations that can be used directly or indirectly to satisfy human wants Outputs Goods and services of value to households Needs Absolute requirements Possibilities What you can do to satisfy wants given your resources Opportunity Cost the best alternative that we give up or forgo when we make a choice or decision Ex By getting laid after a bar you give up sleeping time but gain physical satisfaction Theory of Comparative advantage Theory that specialization and free trade will benefit all trading parties Comparative Advantage when a producer can produce the same good with a lower opportunity cost Absolute Advantage when a producer can produce a product or service using same amount of resources as other producer Consumer goods Goods produced for present consumption Ex Toys clothes food etc Investment Process of using resources to produce new capital In economic terms always refers to investing in capital Ex Buying a building getting an education etc Production Possibility Frontier PPF a graph that shows all the combinations of goods that can be produced if all of society s resources are used efficiently Inefficiency though an economy could have full employment and use of all resources it is still not operating efficiently o Point X on graph Allocative efficiency produces what people want where supply and demand intersect at the least possible cost Efficient mix of outcome Points A B and C Marginal rate of transformation MRT slope of the PPF MRT between points A and B is the ratio of change in capital goods Economic Growth an increase in total output of an economy Occurs with new technology or recourses or when an economy learns to produce more with the same resources Command Economy an economy in which a central gov directly or indirectly sets output targets incomes and prices regulated Ex Communism Laissez Faire Economy Economy where individuals and firms pursue their own self interests without any central regulation unregulated No economy is pure all are mixed somewhere between a Command and a Laissez Faire economy Market the institution through which buyers and sellers interact and engage in exchange Consumer Sovereignty the idea the consumers ultimately
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