ECON 2005 1st EditionExam # 1 Study GuideCH1 and 2WHAT IS ECONOMICS?- Econ- the study of how individuals and socieites choose to use scarce resources to satify unlimited wants- Simply put, economics is the study of the choices agents make. Agents = people or firms or countries—pretty much any decision-making entity. - Micro studies those choices and Macro studies the aggregated effect of those choices- When considering a decision, agents consider the costs and the benefits. - Scarcity affects our decision making by restricting in some way – a scarcity of money, time, natural resources, etc.- opportunity cost: The best alternative that we forgo, or give up, when we make a choiceor a decision.Micro VS macroMicroeconomics looks at the actual act of making a decision Macroeconomics looks at the larger effect of the millions of individual decisions that are madeSubfields of Econ:Industrial Organization - structure and performance of industries Labor economics- factors that determine wage rates, employment and unemployment. Public economics- role of the government in the economyInternational economics has two parts:International trade studies the trade flows among countries and international financial institutionsInternational finance looks at the flow of assets and money between nations Urban and regional economics studies the spatial arrangement of economic activityComparative economic systems examines the different ways that alternative economic systemsfunction. Economic development focuses on the problems of poor or developing countries.*Econometrics uses statistics to test hypotheses and theory. Economic history traces the development of the modern economy. Law and economics analyzes the economic function of legal rules and institutions. The history of economic thought studies the development of economic ideas over time.Neuroeconomics…- Positive vs. Normative vs. PrescriptivePositive economics looks at “what is” -Supported or rejected by evidenceNormative economics looks at what should be-Opinion, Look for the words “should” or “ought to” etc.Prescriptive economics tells people what they should do “If you want to have a comfortable retirement, you should save 15%”Marginal analysis and sunk costs- Marginalism-analyzing the additional costs/benfits arising from a choice or decision- Sunk costs-costs that cannot be avoided regardless of what is done in the future (standing in line)- The rule is to ignore “sunk costs” and focus on the marginal cost and benefit of whateveraction you are considering.- Ex: shouldn’t stay at movie because you already paid, shouldn’t matter how many donuts you’ve already bought if you want anotherOptimizing- Optimizing in “Levels” – all one or all another? Do I want to go to Taco Bell or Waffle House?- Optimizing in “Differences” – choice on the “margin”…I am already at Taco Bell, do I want another taco?Opportunity cost- the best alternative that we forgo, or give up, when we make a choice or decision!Example 1: you can go to the beach but youll miss work and not make $100. OP is $100Learning how to think like an Economist1. Association Vs. CausationDistinguishing if just because A happened before B doesn’t mean A caused B2. Fallacy of CompositionThe mistake people make assuming what is best for one person is best for all people. (cant all steal internet)3. Mistake of ignoring secondary effects or not thinking about unintended consequencesOften people don’t anticipate consequences(child proof bottle, more kids sick because adults leave cap off)4. Be aware of “self selection”Often people choose to be in a group being studied which leads to sample selection bias( avg person switching saves $100.. wouldn’t have switched if weren’t going to save alot.)Resources (focus on society)- Inputs; factors of production- Used to produce goods and services- Goods and services are scarce because resources are scarceo Labor-physical and mental effort, time, payment=wageo Capital-physical and mental capital(goods produced used to produce other goods), payment=interesto Natural resources- renewable, exhaustible, payment=rento Entrepreneurial ability-talent, idea, payment = profitResources make: Goods and Services- Good: see, feel, touch- Service: intangible- Almost all goods and services are scarce: The amount that people desire exceeds the amount available at a zero price.- Choice- We give up some goods and services to get others (opportunity cost). Who uses them: Economic Decision Makers- Households o Consumers-Demand goods and serviceso Resource owners-Supply resources - Firms (also Governments and Rest of the World) also have 2 roleso Demand resourceso Produce goods and servicesHow does this all come together: Markets!- Bring together buyers and sellers- Determine price and quantity- There are 2 types of markets:o Product Markets-Goods and services (or “outputs”-usable products:goods and services)o Resource markets-Resources or “inputs” - A Simple Circular-Flow Modelo Among economic decision makers, we see a “flow” of : resources,products,income,revenue- The main interaction is between Households(provide resources then spend income on goods) and Firms(demand resrouces and pay for resources then supply goods to earn revenue)Digression:- Model-a formal statement of theory, usually mathematical presumed relationship between one or more variables- Variable- measure that can change from time to time or from observation to observationThe “scientific method” (4 steps):1. Identify the question and define relevant variables.2. Specify assumptions (ceteris paribus- “all else equal”, self interested- maximizing own utility, rational-thinking things through)3. Formulate a hypothesis. 4. Test the hypothesis. a. If hypothesis fails, modify approachb. If passes, use hypothesis until better one shows uoGraph reviews- A graph is a two-dimensional representation of a set of numbers, or data.- A time series graph shows how a single variable changes over time.- The Cartesian coordinate system is the most common method of graphing two variables. Have x and y axis.- Slope- relationship between variables, slope of line is (y2-y1)/(x2-x1)o Upward slope means positive relationship between x and yo Downward slope means negative relationship between x and yComparative and absolute advantage (aka “why we trade”):- Absolute