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UO / Economics / ECON 201 / What are the costs of the decision?

What are the costs of the decision?

What are the costs of the decision?

Description

School: University of Oregon
Department: Economics
Course: Introduction to Economic Analysis: Microeconomics
Professor: Erica birk
Term: Fall 2016
Tags: Econ, Economics, Microeconomics, and ECON201
Cost: 25
Name: EC201 Week 1, Day 1 AND Day 2 Notes 9/26-28/16
Description: These notes cover notes from all of week one. Monday 9/26/16 and Wednesday 9/28/16
Uploaded: 09/30/2016
6 Pages 57 Views 1 Unlocks
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Econ 201- Erica Birk: Week 1, Chapter 1        Mon 9/26/16


What are the costs of the decision?



Economists study decision making and the effect(s) of those decisions • What are the costs of the decision?

• What are the benefits of it?

Policy-makers ask questions that economists try to answer

Economics: the study of how people allocate scare resources to satisfy  unlimited wants

Scarcity: the limited nature of society’s resources, given unlimited  wants/needs

MICROeconomics: the study of individual units that make up an economy

MACROeconomics: the study of the overall aspects and workings of an  economy. Macroeconomics involves foundations found in  microeconomics

Prices: the ratio at which two goods are exchanged in a market. Measured  in:


Enumerate the five foundations of economics.



We also discuss several other topics like What is a paradigm? how does is shape research?

• Dollars

• Costs beyond money:

Time

Health

You cannot change one price without changing the price of a related  outcome

The Five Foundations of Economics

1. Incentives: factors that motivate a person to or to not act Positive Incentives: Encourage actions that bring about good  outcomes

Negative Incentives: Encourage actions to avoid bad outcomes Direct Incentives: The obvious incentives of a policy

Indirect Incentives: The more difficult-to-recognize incentives of a  policy

2. Trade-Offs: In order to achieve one goal, you must give up another.  What will bring about the best outcome?


Which policy do you make, and why?



Is the trade-off worthwhile?

3. Opportunity Cost: the highest-valued alternative that must be  sacrificed in order to get something else.

How much will that opportunity cost me?  

Choosing the option that gives the largest benefit minimizes  opportunity cost

4. Marginal Thinking: Evaluating whether the benefit of one more unit of  a given thing is greater than its costs.

About deciding to do MORE or LESS of something you are already  doing

NOT about deciding whether or not to do something at all

Diminishing marginal returns: All else held constant, increasing one  input will eventually lead to negative returns If you want to learn more check out How should these goods be distributed?

5. Trade: Voluntary exchange of goods/services between two+ parties. Markets: Unite buyers/sellers to exchange goods/services

Comparative advantage: When an individual, business, or country can  produce something at a lower opportunity cost than a competitor can Comparative advantage leads to specialties, where one party focuses all resources on one good/service  

The bottom line: Which policy do you make, and why?

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Econ 201- Erica Birk: Week 1, Chapter 1        Wed 9/28/16

Model Building and Gains from Trade

The entire world’s economy is too complicated to completely analyze for  every economic question.  We also discuss several other topics like What is universal instantiation?

• Economists use simplified models to study very specific questions

Economists use the scientific method to answer questions 1. Ask a question

2. Do background research

3. Construct a model to test hypothesis

4. Perform experiments

5. Analyze data- verify, revise, or refute hypothesis

Economists find explanations for the phenomena they observe using  hypotheses

Phenomena are found and hypotheses are tested in the real world because  most economic observations cannot be put into a lab setting

Nothing can be PROVEN. You can only show that, with given information,  tests, etc., it cannot be refuted

NON-BIAS: Separate what IS true and what you WANT to be true • Not always the same thing Don't forget about the age old question of Who is the king of crete?

• Must be impartial  

Use positive statements, avoid normative statements

Positive Statement: Observable phenomena- can be tested and  validated. Describes “what is”

3

Normative Statement: Not (presently) observable phenomena- cannot  be tasted and validated. Describes “what should be”

• Economists use positive statements

• Policy-Makers use normative statements  We also discuss several other topics like What are some of the reasons we first use assessment tools when first meeting a patient?

Models

• Simplified versions of reality designed to analyze specific components  of the world  

• Good models are easy to understand, have flexible designs, and make  useful predictions

• Economists alter only one component of a model to test how that  factor impacts the overall result

Important Econ Vocab: If you want to learn more check out Which is the better sentence when writing for the mass media?

Ceteris Paribus: holding all else constant  

In a model, what can and what cannot be held constant?

• Endogenous Factors: Variables that can be determined within the  model and are contained/controlled within it

• Exogenous Factors: Variables that we take as given. They exist outside  the model and are not controlled within it

Production Possibility Frontier (PPF): A model that illustrates the  combinations of outputs that a society can produce if all of its resources  are being used efficiently

Example: An economy produces two goods, ceteris paribus  PPF curves show the trade-offs between producing two goods • Goods can be made at the same rate

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• Produce less of one good to create more of another

• Trade-offs are rarely constant  

Law of Increasing Relative Cost: The opportunity cost of producing a good  rises as a society produces more of it. Producers may be forced to  manufacture other goods  

Gains from Trade

Absolute Advantage: The ability of one producer to make more than  another given the same resources  

Ex.: Russia vs. U.S. producing fur hats and vodka

Table represents labor hours to produce each good

Russia

United States

Vodka

10

15

Fur Hats

5

6

Russia has the absolute advantage

How many bottles of vodka must Russia give up to produce one fur hat? Russia’s Relative Price:  

• To produce 1 hat, Russia spends 5 hours

• To produce 1 bottle of vodka, Russia gives up 2 hats

• To produce 1 hat, Russia gives up ½ bottle of vodka

United States’ Relative Price:

• To produce 1 hat, U.S. spends 6 hours

• To produce 1 bottle of vodka, U.S. gives up 2.5 hats

• To produce 1 hat, U.S. gives up 2/5 (6/15) bottle of vodka

Comparative Advantage: When a producer can make a good at a lower  opportunity cost than a competitor can

U.S. has the comparative advantage

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• Producers aim to exploit their comparative advantage

• Trade creates value, explains why countries with the absolute  advantage would want to trade

Trade less now to have more later?

Not always, but sometimes useful

Consumer Goods: Products for present consumption

Capital Goods: Products that help produce other goods/services in the  future

Investment: Using resources to buy/create new capital

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