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Chapter 1-4 Notes

by: George Kanavos

Chapter 1-4 Notes ECON-E201

George Kanavos
GPA 3.0
Intro to Economics
James Self

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About this Document

All of the notes for Chapters 1 through 4, Great to study for the test!
Intro to Economics
James Self
Study Guide
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This 11 page Study Guide was uploaded by George Kanavos on Wednesday February 4, 2015. The Study Guide belongs to ECON-E201 at Indiana University Northwest taught by James Self in Winter2015. Since its upload, it has received 274 views.

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Date Created: 02/04/15
Subject Economics 201 Session Chapter 12 First model PPF o Cost o Postive vs normative statements skip quotCircular Flowquot in Ch 2 Model Abstract representation explanation or theory Can use words graph equations Assumptions Simplify o Focus Econ is a Science Hypotheses theories are tested Two Common Thought Mistakes 1 FalseCause Fallacy Ex quotThe Dow fell yesterday on weak employment newsquot quotPost hoc ergo propter hocquot quotAfter this therefore because of thisquot A occurs then B occurs Therefore A caused B 2 Ommitted Variable Problem Ex Stronger positive correlation between number of bathrooms in a house and SAT scores Implication Parents can raise their kid39s SAT score by adding a bathroom People with more bathrooms are wealthier and are able to provide more SAT practice courses and generally spawn smarter kids Humans are doers Motivation Want to be better off Note This is an assumption To make themselves better off humans Produce Trade Consume Production Possibilities Frontier PPF def PPFShows max output combinations of two goods using existing resources to full potential at given state of technology def Technology how resources are combined in production ex of PPF M16 and Graeter39s Black Raspberry Chip quotYou haven39t had ice cream 39til you39ve had Graeter39squot Oprah Winfrey Production Possibilities M16s Graeter39s Opp Cost 100s tons of ea 1000 M16s A 0 18 B 1 17 1 tons of Graeter39s C 2 15 2 tons of Graeter39s D 3 12 3 tons of Graeter39s E 4 7 5 tons of Graeter39s F 5 0 7 tons of Graeter39s Implications More rifle output means less ice cream Cost Exists Cost Sacrifice Nothing is free Everything has a cost Can39t have everything Opportunity Cost Def Opportunity Cost The next best use of a resource given up Ex Cost of E201 attendance today Sleeping Lunching Studying Tuition does not Count You already paid and is not affected whether or not you come to class Sunk Cost a sacrifice from a past decision Opp cost is incremental or marginal cost op cost of one more semester at IU More PPF Opp cost of each 1000 rifles Behavior of opp cost Rises Why Resources are not equally suited to produce all goods Points on PPF are Efficient Beyond Unattainable lnside inefficient PPF separates possible from impossible Slope of PPF Negative Econ interpretation Cost exists Why Scarcity Shape of PPF Concave bowed out interpretation Best Output combination Can39t say It depends Shift to the right an increase in production possibilities see graph 1 page 1 this can be caused by an increase in resources or technological advancement Positive vs Normative Statements Posmve What is What all occur if Testable Ex lf welfare payments are reduced hours worked will rise Ex lf unemployment benefits are extended from 52 to 99 weeks duration of unemployment will increase and unemployment rate will increase Normative Value judgement Can39t be tested Better fairer just How the world SHOULD BE Ex Welfare payments should be reduced We should recycle more trash CapitalConsumption tradeoff Capital goods Produced goods that produce goods see graph 3 page 1 Consumption satisfy wants More Capital now gt more resources next period bigger shift next period faster econ growth living standard rises Butthere39s a tradeoff Consume now or Consume more later True for individuals for societies for rich and for poor Which is better A or B PPF can39t tell us normative question But positive analysis can inform our normative judgements Wa rm u p The patient Protection and Affordable Care Act often called Obamacare will provide a governmentsponsored health insurance system that would cover individuals who do not have private insurance 1 Use a PPF to show the effect on the output of health care and All Other Goods see graph 4 page 1 2 Is it possible for such a program to reduce the cost of health care No 3 How is such a system likely to affect the market for private health insurance PPF cont As the PPF shifts out impossibilities are converted into possibilities By investing now for the futurein machines in educations in children in technology the economy will grow But growth requires the sacrifice of some consumption now Warmups 1 According to the Us Energy Information Administration there are proved reserves of 75 million barrels in the Arctic National Wildlife Refuge and the Outer Continental Shelf That would be enough to replace every barrel nonNorth American imports for at least 22 years Both of these oil reserves have been declared off limits by the US Congress See graph 5 pg1 2quot don39t buy the notion that we have to make a choice between having clean air and clean water and growing this economy in a robust way I think that is a false debatequot See Graph 6 page 1 Written using CourseNotes for Mac and iPad Subject Economics 201 Session Chapter 3 Comp Advancement amp Trade Consuming beyond PPF How possible see graph 1 page 2 Possible through Trade Not a new idea 1817 Not well understood Basic proposition As long as opp costs between trading partners differ both parties can benefit from specialization and trade Absolute Advantage vs Comparative Advantage AADefinition Fewer resources produce same output More output from same resources Is NOT the basis for trade CADefinition Produce at lower opportunity cost Example Yield per acre tons Tomatoes Potatoes Texas 10 5 Idaho 20 15 Opp cost of 1 ton tomatoes In TX 1 tomato costs 12 of a potato In ID 1 tomato costs 34 of a potato Texas has the comparative advantage in potatoes Opp cost of 1 ton potatoes In TX 1 potato costs 2 tomatoes In ID 1 potato costs 43 tomatoes Texas has the comparative advantage in potatoes Note Opp cost of tomato is reciprocal of opp cost of potato Possible terms of trade Opp costs set limits Restate notrade prices ie opp costs ID 43 T 1P or 1 T 34P Exchange rate meets in the middle 1T 12 P or 2T 1P Try this rate of trade 1T 23 P 32 T 1 P Check does Idaho gain Without trade 1 P trades for 43 T With trade 1 P trades for 32 T Idahoans Gain Does Texas gain Without trade 1 T trades for 12 P With trade 1 T trades for 23 P Texans Gain Steps in finding comparative advantage 1 Make table 2 Find pop cost per unit of one good Lower pop cost has comp adv 3 Find pop cost per unit of other good Lower pop cost has comp adv TX 4 Find terms of trade Compare internal pop costs Pick rate of trade where both gain Verify mutual gain For individuals and economies Specialization and trade based on comparative advantage makes both trading partners better off Without trade consumption possibilities are bounded by production possibilities With trade consumption possibilities are bigger than production possibilities Written using CourseNotes for Mac and iPad Subject Economics 201 Session Chapter 4 Market Model Warmup Consider an Economy that efficiently produces 10 figs and 5 dates A technological advancement in date production would lead more figs or more dates but not more of both figs and dates TrueFalseExplain Use a PPF see graph 1 Market Model Recall Demand D is whole schedule Quantity demanded Qd is amount bought at a given price Very important distinction Change in quantity demanded AQd Move along same demand schedule Caused by change in price Change in demand shift of entire demand schedule MoreLess bought at every price Caused by a change in quotother things constantquot Ex Music downloads P per download Q per month quotQdquot see graph 2 4 160 0 140 5 120 10 100 15 80 20 60 25 Demand Shifters L Tastes preferences Adkins diet see graph 56 2 Income Increase in income gt increase in autos it normal good compare increase in Inc gt decrease in demand quotinferiorquot ex bus travel 00 Price of substitutes satisfy some want P increase in Coke gt D increase in Pepsi P decrease in Subs gtD decrease in other good 4 Price of complements Compliment jointly consumed goods P decrease printers gt D increase in paper P increase in compliment gt D decrease in other Expectations of buyers about price in Future it home buyers expect increase in price in future gt increase in demand now U l If home buyers expect decrease in price in future gt decrease in demand now Number of consumers usually refers to changes in population or demographics increase in pop in monroe county gt Increase D for land 03 SUPPLY producersseller behavior Assume Many Sellers rationally def Supply S is A schedule of quantities of a good that will be offered for sale at various prices over some time period other things constant A WILLINGNESS TO SELL not just whats in stock Written using CourseNotes for Mac and iPad


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