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Econ week 1 of notes

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by: Eliza Barrett

Econ week 1 of notes Econ 2000

Marketplace > Clemson University > Economcs > Econ 2000 > Econ week 1 of notes
Eliza Barrett
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Intro to economics
Jonathan Ernest
Class Notes




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This 5 page Class Notes was uploaded by Eliza Barrett on Saturday January 16, 2016. The Class Notes belongs to Econ 2000 at Clemson University taught by Jonathan Ernest in Spring 2016. Since its upload, it has received 87 views. For similar materials see Intro to economics in Economcs at Clemson University.


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Date Created: 01/16/16
Eliza Barrett 1/8/2016 Econ 2000 Lecture 1 Introduction to Economics: 5 Foundations Chapter One - What is economics? The study of how people allocate their limited resources to satisfy their nearly unlimited wants and needs. • Scarcity: Refers to the limited nature of society’s resources, given society’s unlimited wants and needs. Everything is scarce. - Two Branches of Economics • Microeconomics: The study of individual units that make up the economy • Macroeconomics: The study of the overall aspects and workings of the economy The Five Foundations 1. Incentives matter 2. Life is about trade-offs 3. Opportunity costs 4. Marginal thinking 5. Trade creates values - 1. Incentives • Factors that motive you to act or exert effort. People respond to incentives! - Types of incentives: • Positive: Tax refund, pay raise, employee of the month, • Negative: Taxes, jail, fees, fines, failing class, getting fired • Direct: Clear trade off happening (example: Come to our party to get free pizza!) • Indirect: unintended consequences (less incentive to stay home and study, if at party getting free pizza) • Incentives and unintended consequences - Australia was experiencing declining birthrates in early 2000s. Government implemented a baby bonus of $3,000 for all babies born on or after July 1st, 2014. • What type of incentive is this? Positive direct incentive Potential unintended consequences? Unhealthy for delaying birth with harsh cut off, • government spending a lot of money, baby boom - 2. Trade Offs • Scarcity—> give up something to get something else. - Examples: • Eating donuts for breakfast instead of a bowl of fruit. • Attending Clemson means giving up attending another school • Taking four hours to watch a movie or watch a couple of TV shows - 3. Opportunity Costs • The highest-valued alternative that must be sacrificed in order to get something else. - Notice that it is not every alternative, just the next best one. - The economic cost of something is the cost of what you give up to get it. • Examples: - Opportunity cost of going to a “free” concert in Clemson the evening of Monday, January 11th. • The lost opportunity to watch the Clemson vs.Alabama football game - How do you decide? • Minimize opportunity cost by selecting the option that has the largest benefit. - What’s the cost of attending college? • You have to pay for tuition, textbooks, etc. What are you sacrificing? - If not attending college, you would likely have a full-time job - Cost of attending college includes this income which you have to give up - 4. Marginal Thinking • Evaluating whether the benefit of one more unit of something is greater than the cost of that unit. - Examples: • Driving down the highway to another town slightly over the speed limit, is it worth getting there earlier in risk of getting a speeding ticket. • Eating one more slice of pizza, the value of the pizza goes down the more you eat. • One more hour of studying, decide this based on other things you could be doing (sleeping, eating, etc). - 5. Trade Creates Value • Markets bring buyers and sellers together to exchange goods and services - Trade: The voluntary exchange of goods and services between two or more parties • Is there a winner and a loser in every trade? NO, just winners. Trade only occurs if both parties feel they gain from the trade and are better off than they were before. Lecture 2 - Trade requires people to create different things - ComparativeAdvantage – when an individual (or business or country) can produce at a lower opportunity cost than a competitor can. Ceteris Paribus • Latin for “Other things being equal” or “All else equal” Exogenous variables • Variables that are determined outside of the model Danger of FaultyAssumptions • Using faulty assumptions can lead to spectacular policy failures. • It is necessary to often examine and re-evaluate the assumptions in models. • Example:Assumption that housing prices always rise • Pre-2008, banks’computer models did not include a variable for declining housing prices. 1/13 Lecture 3 Gains from trade: comparative advantage Specialization and Gains from Trade Production Possibilities Frontier • Gilligan and Skip live on an island. They have limited resources (time), which they use to produce two things • Gilligan: 20 coconuts; or 10 fish • Skip: 40 fish, 20 coconuts - AbsoluteAdvantage: the ability of one producer to make more than another producer with the same quantity of resources • Fish? Skip • Coconuts? Neither - ComparativeAdvantage: the ability to make a good at a lower opportunity cost than another producer. Look at who is giving up less compared to the other thing. • Coconuts? Gilligan - coconuts/fish= 20/10= 2 - fish/coconuts= 10/20=1/2 • Fish? Skip - coconuts/fish=20/40=1/2 - fish/coconuts=40/20=2 - Specialization and Trade: specialization allows for greater productivity and growth • Without trade: Assume Gilligan and Skip each split their time between producing fish and coconuts - Gilligan produces and consumes 5 fish and 10 coconuts - Skip produces and consumes 20 fish and 10 coconuts • Total: 25 fish and 20 coconuts • With Trade: - What does Gilligan produce? 20 coconuts - Skip? 40 fish • Gilligan willing to trade 10 coconuts for 10 fish (it would cost him all 20 coconuts to catch 10 fish himself) • Skip accepts (he could only get 5 coconuts himself in the time he can catch 10 fish) • Gilligan consumes 10 fish and coconuts • Skip consumes 30 fish and 10 coconuts 1/15 Lecture 4 MC vs MC - Arational choice is always to consume up to the point where MC= MB • If MB>MC then do it • If MB<MC don’t Chapter 3: Supply and Demand Markets and Competition - Firms: supply goods and services - Consumers: want to purchase goods supplied by firms - Exchange happens through established prices in markets - Supply or demand factors can change the market price - Markets exist wherever goods and services are exchanged • grocery store • stock market • real estate • - Acompetitive market has • many buyers and sellers • price takers (no one person sets the price) - Monopoly • single seller that supplies the entire market for a good or service • DeBeers diamond company owned 90% of world’s diamonds in early 1900s - Monopsony • when a market has a single buyer, who has an influence on the price Demand - Quantity Demanded: The amount of a good purchased at a given price • Not the same as “Demand” - Law of Demand: Ceteris Paribus, there is an inverse relationship between price and quantity demanded • If the price goes up, people demand less of the good, and vice versa - Demand schedule • Table showing the relationship between each quantity demanded and price - Demand curve • graphical representation of the schedule - When “demand” is referred to, it means the curve and the schedule Market Demand - Adding up each individual’s demand at each price - IF: • At a price of $1/lb for shrimp - Dan demands 4 lbs - Jenny demands 5 lbs • Then the market demand would be 9 lbs of shrimp Change in quantity demanded vs. change in demand - Movement along the demand curve is a change in the quantity demand • caused by a change in the price of the good - Ashift of the entire demand curve is a change in demand • caused by a change in something other than price • can also think of changing the demand schedule - Increase in demand • a shift out/up to the right - Decrease is a shift in/down to the left Demand shifters - changes in income - price of related goods - changes in tastes and preferences - future expectations - number of buyers in the market


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