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Econ Notes Week 1

by: Leah Barton

Econ Notes Week 1 ECON 2010

Leah Barton
GPA 3.8
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These notes cover the first week of class including what was covered in classes powerpoint, videos, clicker questions, and examples.
Principles of Microeconmics
Class Notes




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This 5 page Class Notes was uploaded by Leah Barton on Monday January 18, 2016. The Class Notes belongs to ECON 2010 at Western Michigan University taught by Kim in Summer 2015. Since its upload, it has received 47 views. For similar materials see Principles of Microeconmics in Economcs at Western Michigan University.


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Date Created: 01/18/16
Econ 2010, 115 Notes What is economics? - Economics is the study of how people behave. Opportunity Cost - No such thing as a free lunch Scarcity – limited resources -Scarcity is the main source of every economic problem. If there was no scarcity, there would be no economics! Every time you make a choice you are sacrificing something Ex: college is not only the cost of tuition, but also the opportunity cost of not getting a job Women in successful careers postpone having kids because the opportunity cost of being successful in a job outweighs the value of having children. How people make decisions? 1. People face tradeoffs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives People make decisions by comparing costs and benefits at he a margins Marginal changes - Small incremental adjustments to a plan of action - Ex: (should I eat another slice of pizza? Or not? / Should I push snooze and sleep for another five minutes? Or wake up?) Marginal benefit (MB)= -the benefit of a “small” increase in an activity Marginal cost (MC) = -the opportunity cost of “small” increase in an activity. - Marginal benefits tend to DECREASE as you do more of it - Marginal cost tends to INCREASE as you do more of an activity. - When MB > MC, = incentive. Sunk cost -Cost that have already been incurred and cannot be recovered. Q- You are considering to stay in college another semester so that you can complete a major in economics. In deciding whether or not to stay you should – -compare the cost of staying one more semester to the benefits of staying one more semester. Q-Assume that you already spent 4 years in college (total cost=50,000) and in order to get and Econ minor, you need to stay one more semester. (cost = 5,000, and benefit = 10,000)What should you do? -50,000 is the sunk cost and is not included in the marginal cost of this decision. Therefore, you should stay because the benefits outweigh the cost! “People respond to incentive” Incentive Three basic incentives: 1. Economic/monetary – desire to receive rewards or money 2. Moral - guilt 3. Social – desire to fit in. To behave in a certain way for acceptance *when the three incentives are put together, you get the best results. - exists if MB >MC - Whenever MB and MC change, people’s incentives change - Policies -> unintended consequences - If you don’t take into peoples incentives when making policies, it could be counterproductive or be ineffective. - Ex: Teacher uses clicker questions to check attendance so that she knows students will show up. It was counterproductive because students were forced to come to class specifically for the questions and than did not pay attention and acted as a distraction to others who cared to be there. There were unintended consequences. - Ex: Anti smoking campaign – Economic incentive is that the cost of cigarettes is too expensive and you feel guilty wasting money. Moral incentive is knowing its harmful to you and harmful to others and make you feel guilty. “Trade can make everyone better off” Trade - People gain their ability to trade with one another. - Competition results in gains from trading - trade allows people to specialize in what they do. - Ex: mom cooks dinner, dad shovels driveway. They trade jobs because it allows them to do things they are good at. - -> VOLUNTARY TRADE ONLY “Markets are usually a good way to organize economic activity” Efficiency Market economy - An economy that allocates resources the decentralized (you make your own decisions rather than the government does in centralized economies) decisions of many firms and households as they interact in markets for goods and services - Because households and firms look at price when they decide what to buy and sell, they unknowingly take into account the social costs of their actions - Price guides decision makers to be more efficient Q- In a market economy, economic activity is governed by- A. Self interest and price “Governments can sometimes improve market outcomes” Governments Three main reasons: 1. WE need to protect markets from abuse – we need the government to have a strong legal system to protect the free market. 2. Achieving the greatest amount of efficiency is not the only goal – finding the fastest way to meet a goal. 3. Sometimes the market is not working perfectly -> Market failure Micro vs. Macro Microeconomics - Deals with the behavior of individual entities in the economy and how they respond to change. (Individuals, households, or industries), think small - The study of the choices of individuals and firms the interaction of these choices and the influence that governments exert on these choices. Macroeconomics – The economy as a whole. (Unemployment, national income), think big. – Economics is a science: - Looks at natural experiments throughout history and uses statistical methods to test the models. - You must have proof to support a theory of statement (like the scientific method) - Collect and look at data The economic models: Use scientific method  Observe and measure  Model building  Testing models *the goal of economic models are to simplify reality to increase our understanding of the world. Ex of models: 1. The Circular-Flow Diagram (dollar flows) 2. The Production Possibility Frontier (PPF) -Scarcity -Choice -Opportunity cost -a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology. Ex: -Two goods: computer and wheat -One resource: labor (measure in hours) -Economy has 50,000 labor hours per month available for production -To produce one computer requires 100 hours of labor -Producing one ton of wheat requires 10 hours of labor A. Computer: 50,000, wheat: 0 B. Computer: 40,000, wheat 10,000 C. Computer: 25,000, wheat: 25,000 D. Computer: 10,000, wheat: 40,000 E. Computer: 0, wheat: 50,000 *Graph to find model Positive vs. Normative Statements Positive Statement - Claims that attempt to describe the world as it is - Can easily evaluate if the statement is right or wrong Normative Statement - Claims that attempt to prescribe how the world should be  Positive statements can be evaluated using data, while normative statements involve personal viewpoints. Ex: I think today’s temperature is 65 degrees. (Positive Statement) Ex: Purple is prettier than pink (Normative Statement) Ex: GDP fell by .5% last quarter (Positive Statement) Ex: The government should print less money. (Normative Statement) Ex: The DOW rose above 15,000 of May 3 . (Positive Statement) Correlation and Causation *CORRELATION DOES NOT EQUAL CAUSATION. Correlation - When two things are related to each other, but do not cause each other. Causation – When you can claim one thing causes another thing to happen. A  B


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