Econ Week 2 Notes
Econ Week 2 Notes ECON 1113-001
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This 5 page Class Notes was uploaded by Parker Thurston on Sunday January 31, 2016. The Class Notes belongs to ECON 1113-001 at University of Oklahoma taught by William Clark in Summer 2015. Since its upload, it has received 34 views. For similar materials see Principles of Economics Macro in Business at University of Oklahoma.
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Date Created: 01/31/16
Week 2: Monday: 2 ubiquitous facts: all resources are scarce wants are unlimited and are what you would buy with infinite income Scarce economic resources: Labor: human skills (mental /physical) used to produce material goods and services (including both an astrophysicist and an athlete, very broad) Land: all natural resources used in production (water power, air power, oil, all natural resources, dependent on technology of those using the resources) Capital: goods used to produce other goods Physical Capital Goods: plant equipment, tools, machinery Human Capital Goods: things or activities such as training or education that increases production Entrepreneurship: human resource who: 1. brings together and organizes other resources in production 2. motivated by self interest reflected by desire for profits 3. BEAR RISK, risk takers 4. always have an idea about how to make profits a. 2 types of ideas, good and bad b. good idea leads to profits c. bad ideas lead to losses Entrepreneurial classes motivated by self interest caused by incentives not found in many socialist states Production Possibilities analysis: first developed by Paul Samuelson captures basis of economic problem if we put all resources into making capital goods we cannot make consumer goods and vice versa costs resources from consumer goods to produce capital goods must sacrifice production of one good to make other goods LABEL AXIS WHEN DRAWING GRAPHS PPC illustrates: 1. scarcity (shown by points outside PPC) 2. anything inside PPC is possible, anything outside is currently impossible due to scarcity 3. the necessity of choice (shown by the question which point?) 4. economic costs; the need to give up one good to produce another, shown by a. downward slope of curve b. increasing cost via increasing negative slope Why is PPC increasing costs: resources are not perfectly adaptable to alternative uses what happens in market economies is that people vote on what goods they want with dollars, called dollar voting Dollar voting makes choices in market economies determines mix of goods in economy Explicit costs: out of pocket costs, money payments Implicit costs: alternatives forgone when the choice is made, what the other things you could’ve done with that money Costs of college education: 1. Explicit a. Room b. Board c. Fees d. Books e. Tuition f. Misc. 2. Implicit a. forgone earnings if student chose to be employed during college Wayman Tisdale: one of the best basketball players in country $0 explicit costs +$1,000,000 per year in implicit costs dropped out senior year to earn money because costs were too high certain assumptions go into PPC analysis: 1. 2 goods 2. fixed resources 3. constant technology 4. full employment assumptions are not realistic, however, assumptions aid in the realism of the model Relaxing assumptions of fixed resources and technological change would cause outward shift of the PPC outward shift =economic growth point inside the graph shows unemployment in the economy Wednesday: Theory of comparative advantage: specialization and trade are mutually beneficial to the trading partners (individuals, regions, nations) *IF* the comparative costs of the traded goods whatever they may be differ How prices are determined in a market economy through supply and demand: competitive markets have many independently acting buyers and sellers, so many in fact that no individual, buyer or seller, can appreciably affect market price in a competitive market you are at the mercy of the market noncompetitive market: collusion by sellers to fix the prices, which can be detrimental to both buyers and sellers Demand: the quantities of a good or service that people are willing to and able to purchase at various prices during some specified time period (a flow variable; measured over time) Law of demand: as the price of a good or service increases, the quantity demanded decreases and vice versa Determinants of demand: 1. price of good or service 2. buyers incomes 3. tastes a. physical, psychological, cultural, religious, etc. desires to purchase 4. number of buyers in market 5. buyers expectations about future prices and/or future incomes 6. Prices of related goods 1. Substitutes a. goods that satisfy the same need 2. Complements a. goods that are used together 3. the price of one substitute or complementary good moves demand for the other DO NOT TRY TO ANALYZE ALL CHANGES AT ONCE Supply: the quantities of goods and services people are willing to produce for sale at various prices during some specified period of time General Relationship: as the price of a good increase, so do the quantities produced Increasing cost industry: as price increases quantities supplied also increase Constant cost industries: at market price, the quantity supplied increases because more people get into the markets trying to produce the items Decreasing Cost industries: as price decreases, quantity suppled increases example: electrical generation plants, expensive to start, costs grow to be less in relation to profits as plant grows Determinants of supply: 1. Price of good or service 2. number of sellers in marker 3. resource prices (costs of production) a. labor, capital, land 4. technology 5. sellers expectations for prices Supply and Demand jointly provide prices Circular Flow of income 1. Households purchase goods and services from firms in exchange for money (resource market where households supply and firms demand) 2. Firms receive labor capital, land, and entrepreneurship from households in exchange for money (output (goods) market where households demand and firms supply) Current Choices and future possibilities: in general more capital goods (k) chosen currently will result in higher future economic growth recall that capital goods are in general goods used to produce other goods Friday: Suppose Government Spending is larger than collected taxes Budget Deficit Financed by government borrowing in the form of US Bonds (IOU) the reduction in Investments caused by a budget deficit is called “crowding out” Demand and supply schedule: as price decreases, demand increases as price increases, supply increases Price is determined by the meeting point of the supply and demand schedule curves, called equilibrium price/quantity price changes automatically lead to the equilibrium or market clearing price via the “invisible hand” named by Adam Smith What might paralyze the “invisible hand”? Natural Disasters
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