Econ 2030 Lecture 1 & 2
Econ 2030 Lecture 1 & 2 Econ 2030
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This 0 page Class Notes was uploaded by Melissa Cooey on Sunday January 24, 2016. The Class Notes belongs to Econ 2030 at Auburn University taught by Dr. Stern in Spring 2016. Since its upload, it has received 164 views. For similar materials see Macroeconomics in Economcs at Auburn University.
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Date Created: 01/24/16
Monday January 25 y Lecture 1 Economics Foundations and Models What is this class about Scarcity a situation in which we have limited resources but unlimited wants Scarcity forces us to make choices Economics is the studv of these choices Economists study these choices using economic models which are simplified versions of reality used to analyze realworld economic applications Three Key Economic Ideas 1 Peoole are rational Rational using all available resources to achieve your goal Rational consumers and firms weigh the costs and benefits of each action and try to make the best decision possible 2 Peoole resoond to incentives As incentives change so do the actions that people will take Example Cheaper fast food nonactive entertainment and better healthcare is an incentive to be unhealthy Optimal decisions are made at the margin Compare the extra benefit of an action with the cost of the action Example The cost of watching tv for an extra hour as opposed to studying for an hour For every extra hour that you watch tv instead of studying your grade goes down half a letter grade Economists think about decisions like this in terms of the marginal cost MC and marginal benefits MB the additional cost or benefit associated with a small amount extra of some action Comparing MC and MB is known as marginal analysis Monday January 25 y Choose an action that is MBzMC The Economic Problem That Every Society Must Solve 1 What goods and services will be produced Individuals firms and governments must decide on the goods and services that should be produced An increase in the production of one good requires the reduction in production of some other good This is called a tradeoff resulting from the scarcity of productive resources The highestvalued alternative given up in order to engage in some activity is known as the opportunity cost 2 How will the goods and services be produced A firm might have several different methods for producing its goods and services 3 Who will receive the goods and services produced The way we are most familiar with in the US is that people with higher incomes obtain more goods and services Changes in tax and welfare policies change the distribution of income though people often disagree about the extent to which this redistribution is desired Types of Economies Depending on who makes the above mentioned three decisions there are three tvoes of economies 1 Centrally Planned Economies where governments decide what to produce how to produce it and who receives the goods and services former USSR 2 Market Economies where the decisions of households and firms determine what is produced how it is produced and who receives the goods and services 3 Mixed Economies have features of both of the above most developed countries like the US Germany Japan etc Thursday January 28 y Economic Models Economists develop economic models to analyze realworld issues Building an economic model often follows these steps 1 Decide on the assumptions to use in developing a model 2 Formulate a testable hvpothesis 3 Use economic data to test the hypothesis 4 M the models it fails to explain the economic data well 5 Retain the revised model to help answer similar economic questions in the future Important features of economic models Assumptions and simplifications every model needs them in order to be useful Testability good models generate testable predictions which can be verified or disproven using data Economic Variables measurable items that can be used to insert realworld data into the model The Scienti c Nature of Economics Economist try to mimic natural scientists by using the scientific method But economics is a social science studying the behavior of people is often tricky When analyzing human behavior we can perform Positive analysis the study of what is descriptive can be tested with data doesn39t have to be true though Normative analysis the study of what ought to be judgmental prescriptive reflects someone s opinion rather than fact 1 The standard of living in the United States should be the highest in the world Normative cannot be tested 2 If the price of gas keeps on falling more brand new cars will be sold in the US Monday January 25 y Positive can be tested with data 3 The Obamacare should be replaced with some other more efficient health care system Normative can be tested with data 4 The US government should not have bailed out US auto manufacturers Normative cannot be tested 5 Rising global demand for coal has led to increases in the price of coal Positive can be tested with data 6 The tuition at Auburn should be lower Normative cannot be tested 7 Successful football seasons at Auburn result in higher freshmen enrollment in the following fall semesters Positive can be tested with data 8 Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable Normative cannot be tested Microeconomics and Macroeconomics Microeconomics is the study of How households and forms make choices How they interact in markets How the government attempts to influence their choices Example What factors determine the price of college tuition Macroeconomics is the study of the economy as a whole including topics wish as inflation unemployment and economic growth Example What is the level of inflation 1 How much will be saved and how much will be produced in the entire economy 4 l 4gt 0quot Wednesday January 27 y Macro entire economy What factors determine the price of airline tickets Micro particular market What will the level of unemployment be in the entire economy Macro economy as a whole Why was the recession of 200709 so severe Macro entire economy Should you major in economics finance or history Micro individual matters Monday January 25 y Lecture 2 Math Review Graphs with One Variable Bar Diagram Line Graph Pie Chart Graphs of Two Variables Use graphs to show the relationship between 2 variables Ex price and quantity demanded demand curve and price and quantity supplied supply curve To draw a graph you can use information presented in 1 a table or 2 an equation Slopes of Lines Slope is a measure of how much variable y changes when variable x changes by 1 unit sensitivity measure Slope chande in value on the vertical axis rise change in value on the horizontal axis run Graphs of Two Variables There are 3 main types of linear relationship between 2 variables Positive ex disposable income and consumption Thursday January 28 y Negative ex price and quantity demanded NO relationship ex of flies in the summer and real GDP Few economic relationships are actually linear Nonlinear simply means that the slope is NOT constant 4 main types of nonlinear relationships 1 Positive slope that increases 2 Positive slope that decreases 3 Negative slope that increases 4 Negative slope that decreases Form u las Formulas for a percentage change One important formula is the percentage change The percentage change is the change in some economic variable usually from one period to the next expressed as a percentage The percentage change in a variable X is defined as X new X old X old x 100
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