Principles of Microeconomics Week 1 Notes
Principles of Microeconomics Week 1 Notes Econ 106
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This 6 page Class Notes was uploaded by Nadia Choi on Thursday April 7, 2016. The Class Notes belongs to Econ 106 at DePaul University taught by Sébastien Mary in Spring 2016. Since its upload, it has received 21 views. For similar materials see Principles of Macroeconomics in Economcs at DePaul University.
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Date Created: 04/07/16
Nadia Choi ECO 106 Mary Principles of Macroeconomics Theme: Introduction to Economics and Markets Week 1: Introduction to Macroeconomics 1. Thinking like an economist Think in terms of alternatives Evaluate the cost and benefit of individual and social choices Examine and understand how certain events and issues are related Fracking or (hydraulic fracturing): process of extracting natural gas from shale rock layers deep within earth o Oil prices o Russia’s trade? o Environment? Yes (Cream) / No (Pink) 1. The economist as a scientist The economic way of thinking… o Involves thinking analytically and objectively o Makes use of the scientific method o Should be/is o Is economics a science? Some say it is a dismal science… The Scientific Method: Observation, Theory, and More Observation Uses abstract models to help explain how a complex, real world operates Develops theories, collects, and analyzes data to evaluate theories Jean Bodin in Spain at the time of “conquistadors” The Role of Assumptions Economists make assumptions in order to make the world easier to understand The art in scientific thinking is deciding which assumptions to make Economists use different assumptions to answer different questions Economic Models Economists use models to simplify reality in order to improve our understanding of the world The most basic economic model is: o The circular flow diagram Our First Model: The CircularFlow Diagram The circularflow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms Firms o Produce and sell goods and services (Y:cake) o Hire and use factors of production Households o Buy and consume goods and services (C:eat) o Own and sell factors of production Markets for goods and service o Firms sell o Households buy Markets for factors of production o Household sells o Firms buy Factors of production o Inputs used to produce goods and services o Land, labor, and capital ACTORS, INPUTS, OUTPUTS AND MARKETS Microeconomics and macroeconomics Microeconomics focuses on the individual parts of the economy o How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole o Economywide phenomena, including inflation, unemployment, and economic growth 2. The Economist as Policy Advisor When economists are trying to explain the world, they are scientists When economists are trying to change the world, they are policy makers “thin line” Positive statements: objective and fact based, do not have to be correct, but must be able to be tested, proved, or disapproved Normative statements: subjective and value based, opinion based, does not have to be proved or disapproved Positive vs Normative Analysis Positive or Normative Statements? o An increase in the minimum wage will cause a decrease in employment among the leastskilled. POS. (cream)/NORM. (pink) Positive o Higher federal budget deficits will cause interest rates to increase. POS. (cream)/NORM. (pink) o The income gains from a higher minimum wage are worth more than any slight reductions in employment. POS. (cream)/NORM. (pink) Normative o State governments should be allowed to collect from tobacco companies the costs of treating smokingrelated illnesses among the poor. POS. (cream)/NORM. (pink) Normative Why economists disagree They may disagree about the validity of alternative positive theories about how the world works. They may have different values and, therefore different normative views about what policy should try to accomplish A (typical) economist’s joke [A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, ”Lets smash the can open with a rock.” The chemist says, “Lets build a fire and heat the can first.” The economist says, “Lets assume that we have a canopener…” (Funny or not, some of the above may be intended as humor.)] The last crisis Crisis late 2000s, with large rise in unemployment No one saw it coming…or did they? Are economists too dogmatic? Are economists blind to reality and facts? Do economists know too little? Principle #1: People Face Tradeoffs (INTERNAL) To get one thing, you usually give up another. o Efficiency means society gets the most that it can from its scarce resources. (some people get more pie than the other) vs o Equity means the benefits of those resources are distributed fairly among the members of society. (pie is more evenly distributed) Principle #2: The Cost of Something is What You Give Up to Get it (INTERNAL) Decisions require comparing costs and benefits of alternatives o Whether to go to college or to work? o Cost of something=cost of thing you are giving up o Ex: hour of studying=hour of partying Kobe Bryant skipped college and entered the pros right after high school. Average entry age of NBA players become younger and younger. Cause > college tuition too high, can not afford, Principle #3: Rational People Think at the Margin (INTERNAL) Marginal changes are small, incremental adjustments to an existing plan of action. (small change to existing plan) o Cost/Benefit analysis o Study a Masters? o Buy another 1% of Apple Stocks? People make decisions by comparing costs and benefits at the margin. How much money are you making, how much are you playing, and what are the risks involved? Principle #4: People Respond to Incentives (INTERNAL) Marginal changes in cost or benefits motivate people to respond. The decision to choose an alternative over another occurs when that alternatives marginal benefits exceed its marginal costs! 10 mics in studio, 800 singers, what do u slightly change to make more money One of the main challenges is to increase workers productivity. How? If students go to SI, you do well and get a decent grade. Getting the good grade is the incentive. Free coffee in classroom instead of buying Starbucks encourage students to attend class more. Principle #5: Trade Can Make Everyone Better Off. (INTERACTIVE) People gain from their ability to trade with one another. o Specialization in what we do best or what gives us the most money. Competition results in gains from trading. Trade allows people to specialize in what they do best. Specialization do what you do best! Principle #6: Markets Are Usually a Good Way to organize Economic Activity. (INTERACTIVE) A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. o Households decide what to buy and who to work for. o Firms decide who to hire and what to produce. Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” o Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into the account of social costs. Principle #7: Governments Can Sometimes Improve Market Outcomes. (INTERACTIVE) Market Failure occurs when the market fails to allocate resources efficiently. When the market fails (breaks down) government can intervene to promote efficiency equity. Examples: o ComEd: o RCN: o Monsanto: Principle #8: The Standard of Living Depends on a Countrys Production. (OVERALL) Standard of living (e.g. how long we live) may be measured in different ways: o By comparing personal incomes. o By comparing the total market value of a nations production (e.g. GDP). Almost all variations in living standards are explained by differences in countries productivities. Comparing GDP/Employment rates/Inflation/Personal Incomes Productivity=output/hours Principle #9: Prices Rise When the government Prints Too Much Money. (OVERALL) When the government creates a lot of money, the value of it falls Inflation general rise on price level Principle #10: Society Faces a ShortRun TradeOff Between Inflation & Unemployment. (OVERALL) Phillips curve What you know now How assumptions and models shed light on the world The circular flow model The difference between macroeconomics and microeconomics The difference between positive and normative statements When economists can help design public policy When economists disagree
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