Week 1 Notes
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This 5 page Class Notes was uploaded by Rachel Moore on Friday January 22, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2015. Since its upload, it has received 286 views. For similar materials see Macroeconomics in Economcs at University of Georgia.
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Date Created: 01/22/16
ECON 2105 January 13, 2016 – January 22, 2016 Chapter 1 What is economics? The study of how people make choices. The study of choices in the presence of scarcity (limited resources, unlimited wants). Economists study how individuals, companies, government, etc behaves; the allocation of resources to given wants. People Respond To Incentives “No Child Left Behind” o Why did this increase ADHD? ADHD students were exempt from statistics. Lower income families receive more government assistance for having an ADHD child more children diagnosed with ADHD Seattle bans plastic bags and charges for paper to try and help the environment o People start stealing plastic baskets and throwing them away (environmental problems). o Businesses have to keep replacing baskets. o More stolen goods because bags are not see through and everyone brings their own bag. o Food poisoning increase in nearby hospitals; Salmonella & E. Coli increase because of meat leaking in bags and infecting future vegetables. 5 Big Concepts Incentives Trade Offs Opportunity Cost Making Decisions at the Margin Trade Increases Total Value Two Major Divisions of Economics Microeconomics – individual units (person, company, country); externalities, Bob’s budget, firm decisions, etc. Macroeconomics – interactions of the individuals as a whole economy; GDP, inflation, tax policy, exchange rates, etc. Scarcity of Time You choose how to use your time. Nothing/no one can change the amount of time. Incentives Positive Negative Direct (hopefully causes desired result) Indirect (unexpected behavior; things people didn’t see coming) Seattle Example o Direct: help the environment o Indirect: stealing “No Child Left Behind” o Direct: increase test scores and better school performance o Indirect: increase in ADHD Incentives change our behavior. o New $150 tax on new iPhone only o Buy one, get one Chick-Fil-A sandwich coupon Trade-offs and Opportunity Costs You can’t do everything so you must make trade-offs. o 1 hour: study or go to dinner with friends o $5: buy a spicy chicken sandwich or get a coffee o Budget: rebuild Terry Business College or hire new faculty o Tax $: expand I85 to Atlanta or upgrade Savannah river dam Opportunity Cost “Highest value forgone alternative” or “best thing given up”. The trade-off of your next best choice for your resources. Not the sum of your options. The best option given up. Does not imply only money. Milk is cheaper at Sam’s Club; people still buy milk at RaceTrac to save time. Brewing your own coffee is cheaper than going to Jittery Joe’s; people still buy coffee to save time. The Principle of Self Interest The Economic Man o Rational – that is thoughtful and deliberative o Evaluating – calculates and compares options o Maximizing – chooses the best option Making Decisions at the Margin Most decisions are incremental changes and are not “all or nothing”. You stop when the additional cost is greater than the additional benefit of an action. Optimal Decision Point: when the marginal benefit equals the marginal cost (MB = MC). Trade Increases Total Value Why do we trade? It is beneficial to both parties. What is a market? Any place where buyers and sellers meet to buy/sell goods and services. Why do markets make us better off (increase value)? We end up with more “stuff" when we trade, if everyone focuses on his or her Comparative Advantage. o Comparative Advantage: being the “low cost producer”; having the lowest opportunity costs. o By buying coffee, you’re trading your money to get coffee for the hard work that went in to making the coffee (grow, grind, roast, package, etc). o Competition or Cooperation? Both. We cooperate by doing what we are good at and then trading. Competition is deciding who to cooperate with. Chapter 2 Like other sciences and social sciences, problems are solved and research is conducted using the scientific method. Economics stays away from emotional topics. Economics is objective. Deal with things that can be proved. Positive Economics (the "is”): analysis of situations; not argumentative; reasonable people, armed with sufficient facts, do not disagree. Example: the unemployment rate is ___ Normative Economics (the “should be”): goal oriented; specify an objective function and determine techniques to achieve goal; argumentative. Example: how to make the unemployment rate lower Example: The light in the room is on (positive). Are we better off if the light is on or off (normative)? What is a theory? We create a theory and try to explain them using models. A map is a model that is simple, general, and useful. Models and experience are applied to new situations to see if the model fits. Ceteris Paribus – other things the same. De gustibus non es disputandum – to each his own; there is no accounting for tastes. BIG PICTURE: Why trade? Markets exist for trade. Unemployment is about people trying to trade their skills. GDP is “bean counting” for trade. o How well a country is doing Taxes affect trade and then the government uses revenue to engage in trade. o Promotes or discourages trade Monetary Policy influences trade. International Markets trade with different legal rules and money. Production Possibilities Frontier (curve): a graph that shows the possible combinations of output that the economy can possibly produce given Available factors of production Available production technology B D Waffle Fries A C A. Inefficient B. Efficient C. Efficient D. Not Possible PPF Concepts: Efficiency – optimal use of resources Trade-offs – constraints to what is possible forcing a substitution of one thing to attain another. Opportunity cost – “highest forgone” alternative Economic growth – increase in output Interdependence is the norm because people are better off (in most cases) when they specialize and trade with others. Comparative advantage: differences in opportunity costs are the basis for specialized production and trade; being the low cost producer of a good. Absolute advantage is the ability to produce more in total of something by comparison. 12 F 12C Fish Coconuts Bob = 1F Bob 12 12 12 12 = 1C Ray 24 12 24F 12C Ray 12 = 12 2F