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Econ Lectures 1-3

by: Rachel Brown

Econ Lectures 1-3 Econ 1015

Rachel Brown
GPA 3.75

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These notes (9 pages long) cover the first half of what is on the first exam which in on Feb 23. Notes include a summarized version of the lecture notes from class, good examples as well as the key...
Principles of Macroeconomics
Vitor Trindade
Economics 1015
75 ?




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This 10 page Bundle was uploaded by Rachel Brown on Wednesday February 10, 2016. The Bundle belongs to Econ 1015 at University of Missouri - Columbia taught by Vitor Trindade in Spring 2016. Since its upload, it has received 52 views. For similar materials see Principles of Macroeconomics in Economcs at University of Missouri - Columbia.


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Date Created: 02/10/16
NOTE: THESE DEFINITIONS AND EXAMPLES COME FROM THE TEXTBOOK AND THE NOTES UNDER THE BLUE HEADINGS COME FROM THE LECTURES/NOTES I TAKE IN CLASS Rachel Brown Econ 1015 Notes Lecture: 1 Dates: 1/19 Covers Chapters: 1 Dr. Trindade T/Th 12:30-1:45 Lecture #1: Chapter 1 THE FIVE FOUNDATIONS OF ECONOMICS Vocab (Ch. 1) NEED TO KNOW:  Scarcity: Refers to the limited nature of society’s resources, given society’s unlimited wants and needs  Economics: The study of how people allocate their limited resources to satisfy their nearly unlimited wants  Microeconomics: The study of the individual units that make up the economy  Macroeconomics: The study of the overall aspects and workings of an economy  Incentives: Factors that motivate a person to act or exert effort  Opportunity Cost: The highest valued alternative that must be sacrificed in order to get something else  Economic Thinking: Requires a purposeful evaluation of the available opportunities to make the best decision possible  Marginal thinking: requires decision makers to evaluate whether the benefit of one more unit of something is greater than its cost  Markets: Bring buyers and sellers together to exchange goods and services  Trade: Is the voluntary exchange of goods and services between two or more parties  Comparative Advantage: Refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can What is Economics?  Scarcity o Resources are limited o Dr. Trindade’s definition of Economics: optimization with constrained resources o Also relates to how people and organizations allocate their limited resources to satisfy wants o How people/organizations make decisions o No scarcity  no need for economics Micro vs. Macro- What’s the difference? Macro- how the economy as a WHOLE behaves. Examples include inflation, growth, employment, interest rates and productivity  Examples of Macro topics include: inflation, economic growth and productivity, interest rates, aggregate demand and supply Micro- Decisions of individuals, households, and business immersed in economy What are the SIX foundations of economics? 1. Incentives Matter 2. Life is about trade-offs 3. Opportunity Costs 4. Marginal Thinking 5. Trade Creates Value 6. People are Rational 1. Incentives Matter Incentives = factors that motivate you to act or exert effort. People will respond to them!  Positive Incentives- tax refund, tax credits, pay raise, employee of the month award, stick and smiley face  Negative Incentives- Taxes, fees, jail, fines, getting grounded, getting fired, failing class Direct vs. Indirect Incentives:  Direct: Easy to recognize o Example: mow my lawn and I’ll give you $40, Get straight A’s and go to Disney World, etc.  Indirect: Harder to recognize o The child may have an indirect incentive to cheat! What are Unintended Consequences?  Unintended Consequences are an unplanned result (usually negative and unwanted) of an incentive o Example: Social safety net. Most will agree we need a safety net for those who don’t work. But, what if the safety net is higher than they can make at the job?  Indirect Incentive: Is to stay on welfare instead of work Incentives and Innovation:  Patents and copyrights  incentive to innovate  Result of strong patent system  More innovation since people are rewarded for new popular inventions. However, there’s monopoly power to patent holders 2. Life is About Trade-Offs Without scarcity, decisions incur costs and bring up questions you must think about Ex: If I go to the movie, what should I see? If I go and vote, who should I vote for? Trade-Offs and Policy  The government faces tradeoffs as well as us! o Ex: Should we spend our tax dollars on roads or schools?  Whichever decision they make will come with a gain and a loss 3. Opportunity Cost Opportunity Cost  the highest valued alternative that must be sacrificed in order to get something else. NOT ALL ALTERNATIVES, JUST THE BEST CHOICE!  In other words, what you give up to get something o Ex: you have a high opportunity cost. Here is another example: If a gardener decides to grow carrots, his opportunity cost is the alternative crop that might have been grown instead (let’s say potatoes). In both cases, a choice between two options must be made.  Scarcity  Choice  Opportunity Cost 4. Marginal Thinking Economic thinking: optimization under constrained resources. One way to do this is through marginal thinking Marginal Thinking  Evaluate: Is the benefit of one more unit greater than its cost? o Another example: Is staying up that extra hour to studying Facts: Is going to college worth it?  Statistically not as likely to be hit by unemployment during a rough economy  College grad jobs have better hours usually ad better working conditions  Education leads to positive externalities 5. Trade Creates Value Markets  bring buyers and sellers together to exchange goods and services Trade  the VOLUNTARY exchange of goods and services Benefits both parties Comparative Advantage: Without trade, you would have to produce everything you consume Comparative advantage  The situation in which an individual, business or country can produce at a lower opportunity cost than a competitor Trade Specialization  You go to Starbucks to get coffee, go to pharmacy when you need meds Rachel Brown Econ 1015 Notes Lecture: 2 Date: 1/21 Covers Chapters: 2 Dr. Trindade T/Th 12:30-1:45 Lecture #2: Chapter 2 Model Building and Gains from Trade Vocab (Ch. 2) NEED TO KNOW:  Positive Statement: Can be tested and validated, can be proven true or false  Normative Statement: Is an opinion and can’t be tested or validated  Ceteris Paribus: Is the concept under which economists examine a change in one variable while holding everything else constant  Endogenous Factors: Are the variables that can be controlled for in a model  Exogenous Factors: Are the variables that can’t be controlled for in a model  Production Possibilities Frontier: Is a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently  Law of Increasing Relative Cost: States that the opportunity cost of producing a good rises as a society produces more of it  Absolute Advantage: Refers to the ability of one producer to make more than another producer with the same quantity of resources  Consumer Goods: Are produced for present consumption  Capital Goods: Help produce other valuable goods and services in the future  Investment: The process of using resources to create or buy new capital Scientific Methods In Economics They are similar to “hard sciences”  Construct a theory or hypothesis  Design experiments to test the theory: actual experiments but more like surveys or any other form of data collection  Analyze the data to test the theory Difference from hard sciences  Economist’s lab is the world around us  Not always able to design experiments  Historical data often used Positive and Normative Analysis Positive Statement  a claim that can be tested true or false Normative Statement  Statement of opinion can’t be tested true or false. Usually contains the words “ought to” or “should be” Economic Models Models:  Allow us to understand complex problems  Simplified versions of reality  Use assumptions  Are considered good if they predict accurately Ceteris Paribus = means “other things being equal” in Latin Assumption in which we examine a change in one variable, but hold all other variables constant. Therefore allows us to isolate the effect of a single variable Economic Analysis Endogenous Factors  variables controlled for inside a model Exogenous Factors  Variables that are not accounted for in a model These variables inside the model can have positive or negative effects Danger of Faulty Assumptions Assumptions in models need to be re-examined often Ex: Assumption that housing prices always rise Production Possibilities Frontier PPF:  Combinations of outputs that a society can produce if… o It uses its resources o Efficiently  Assumptions of this model: o Resources are fixed o Technology is fixed o Only 2 goods In the PPF figure of wings and pizza, it is downward sloping (L to R) X Axis: Quantity of wings produced Y Axis: Quantity of pizza slices produced Therefore the graph in a combo of (W, P) Production Point Production Bundle Why is it downward sloping? Must give up one good to increase production of the other Why are we unable to produce certain combinations? Scarcity and limited resources Where are the efficient production points? On the line Where are the inefficient points? Inside the PPF, close to origin Why would the economy produce at an inefficient point? Unemployed workers, unused buildings What are the unattainable (unfeasible) points) Points outside the PPF Why is the PPF a straight line? Constant opportunity cost PPF and Opportunity Cost Recall opportunity cost: Highest valued alternative What we give up as a result of an action Opportunity cost in this case is the slope of the PPF *If it asks you what the opportunity cost is of producing a single wing, find rise over run and do the opposite axis as a fraction for the desired product’s opportunity cost* In conclusion- a straight PPF means a constant opportunity cost We can draw a more realistic PPF by assuming a non-constant opportunity cost. The PPF will become bowed outward like a rainbow and doesn’t have a constant slope. As we move from left to right, opportunity cost will increase Law of Increasing Relative Cost Opportunity cost increases as you increase production of a good As we produce more of good A, we have to give up increasingly larger amount of good B Rachel Brown Econ 1015 Notes Lecture: 3 Date: 1/26 Covers Chapters: 2 Dr. Trindade T/Th 12:30-1:45 Lecture #3: Chapter 2 Model Building and Gains from Trade Vocab (Ch. 2) NEED TO KNOW: ~Chapter 2 vocab on previous set of notes ~ PPF and Opportunity Cost Nonlinear PPFs For more realistic PPF, assume a non-constant opportunity cost: PPF “bowed outward”  The PPF does not have a constant slope  As we move from left to right the slope and therefore the opportunity cost increases Intuition for nonlinear PPFs and for the law of increasing relative cost (=opportunity cost)  Inputs (resources) are not perfectly homogenous  Some inputs are better at making pizza and some are better at making wings  As we expand pizza production, we first use the inputs that are the best  They cost relatively little in terms of wings  If we keep adding pizza production, we now need to give up inputs that are best at making wings  This costs a lot in terms of wings we need to give up Shifts in the PPF So far, technology and resources are fixed. If technology improves or resources increase (or people enter the labor force), the PPF will expand outward making some previously unfeasible good combinations feasible New resources or technology can either affect the production of ONE or BOTH goods Potential Misconceptions About Trade -Trade is a zero-sum game -When two countries trade, one loses and the other gains -We lose when we import more goods from China than they import from us -Each country should maximize the amount that it imports -If the US is more productive in one good, it should produce it instead of importing it -If one country is more productive in making all goods it can’t gain by trading with a less productive country Specialization and Trade  Specialization and trade can also create gains If Debra can produce 60 pizzas and 120 wings in a day and Mike can produce 24 pizzas and 72 wings in a day, let’s talk about who has the absolute and comparative advantage. Only comparative advantage will matter here. To analyze this, think about the PPF line. Debra has the CA in pizza production Mike has the CA in wing production Fact: As long as the terms of trade are between the opportunity costs of the trading partners, the trade benefits both sides Trade-off Between Present and Future  Consumer goods o Goods produced for current consumption o Food, housing, clothing, entertainment  Capital goods o Goods that help produce other valuable goods o Buildings, factories, roads, machinery, computers  Investment o Using resources to make new capital Capital Growth and Future Growth When we change the amount of capital invested in the short run, we change: Where we are on the curve in the short run How much in total society will produce shifts of the trade off in long run In the last 20 years, China and India have invested more, compared to the United States and Europe. Result: China and India are sacrificing today’s consumption for a better future and they have higher growth rates Visualizing Investment Today, many are hesitant to invest in capital goods even if it results in larger consumer good production tomorrow  Today’s investments may: o Take a long time o Have a large opportunity cost o Have uncertain results In conclusion: -Economists use simplified models to understand how the economy works -The PPF illustrates the benefits of trade and allows us to describe ways to grow the economy -When producers specialize, they focus their efforts on those goods and services for which they have the lowest opportunity cost and trade with others who are good at making something else


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