Econ Week One Lecture Notes
Econ Week One Lecture Notes ECON 2100
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This 23 page Class Notes was uploaded by Khaila Coissiere on Monday February 1, 2016. The Class Notes belongs to ECON 2100 at Georgia State University taught by Fatma Romeh Mohamed Ali (P) in Fall 2015. Since its upload, it has received 15 views. For similar materials see THE GLOBAL ECONOMY in Economcs at Georgia State University.
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Date Created: 02/01/16
Tools of theTrade Introduction: Key Concepts and Principles in Economics Chapter Overview Economics Defined Marginalism and Opportunity Cost The Role of Incentives The Scope of Economics Positive and Normative Economics Why Study Economics Why Study the Global Economy Economics Defined Economics is a social science which is concerned with how people, both individually and collectively, make choices. Economists assume that people make choices that maximize their wellbeing (happiness) given the limited resources they have. It is because resources are scarce (limited) that we have to make choices. Resources are anything that can be used in production: land, labor and capital. Land includes the earth and the minerals, fish, water, and forests found on it. Labor is the mental or physical effort that people provide. Capital is the goods needed to make finished products such as machines. (physical capital) or the education and training that people acquire (human capital). How People make their choices? 1) Marginlaism 2) Opportunity cost 3)The role on incentives Marginalism Marginalism or “thinking at the margin” means that before making a decision one must analyze the additional or incremental costs and benefits arising from a choice or decision. Incremental Costs are referred to as marginal cost (MC). Incremental Benefits are referred to as marginal benefits (MB). The Economic Decision Rule states that if the marginal benefit is greater than the marginal cost, then one should pursue that activity; however, if the marginal cost is greater than the marginal benefit, then one should not pursue that activity. Symbolically, we can express the economic decision rule as follows, if MB>M→ YES if MB<MC→ NO Marginalism Should Delta ever charge a passenger less than the average cost of a seat? Opportunity Cost Opportunity cost is what you give up (or forgo) when you make a choice. Opportunity cost can be explicit or implicit. Explicit costs are out-of-pocket expenditures. For example, the tuition you pay to attend college is an explicit cost. Implicit cost are hidden expenses. For example, if you are attending college fulltime it precludes you from working fulltime and the money that you could have made while working is an implicit cost (the opportunity cost of your time). Opportunity Cost Opportunity Cost differ for individuals. What is your opportunity cost of attending college? What is it for LeBron James? Opportunity Cost Opportunity cost does not have to be monetary. What’s the opportunity cost of you partying on Saturday night? Question: Economists estimated that the government must spend $4,000 on drug control to deter one person from using drugs and the cost that one drug user imposes on society is $900.Based on this information alone,should the government spend the money on drug control? Answer: Not if the cost to deter is marginal. Society spends $4,000 to gain $900 of benefit. MB < MC. Don’t do it. The Role of Incentives Incentives are rewards and penalties that motivate behavior. Economists believe that since people usually exploit opportunities to make themselves better off they will respond to incentives. Example of rewards: If salaries of school teachers start to rise,more students will major in education Example of penalties: When parking enforcements starts to aggressively ticket cars around the university campus,fewer students will park illegally. The Scope of Economics There are two major divisions of economics:microeconomics and macroeconomics. Microeconomics focuses on the individual decision-making agents such as the individual,the household,the firm and the industry. Economists generally date the start of microeconomics to the 1776 publication of the book commonly referred to as the“Wealth of Nations” byAdam Smith. The Scope of Economics (Cont.) Macroeconmics looks at the economy in its entirety. It deals with sums or aggregates. Most economists date the start of macroeconomics with the 1936 publication of the book The GeneralTheory of Employment,Interest and Money by John Maynard Keynes. Positive and Normative Statements Positive statements describe the world as it is – they are value-free. They describe what is and how it works without making any judgments. Normative statements propose how the world should work – they are judgmental. They evaluates outcomes as good or bad,and may prescribe a course of action. Positive vs. Normative “Today isThursday.” Positive or Normative? Answer: Positive! Positive vs. Normative “We should eliminateWednesday andThursday from the calendar so that today can be Friday.” Positive or Normative? Answer: Normative! Positive vs. Normative “What society feels is fair is determined largely by cultural norms.” Positive or Normative? Answer: Positive! Positive vs. Normative “Society generally agrees that people shouldn’t text and drive.” Positive or Normative? Answer: Positive! Positive vs. Normative “People shouldn’t text and drive.” Positive or Normative? Answer: Normative! Pitfalls and Hazards The Post Hoc Fallacy is a pitfall that deals with correlation and causation. Just because two events happen to be correlated doesn’t necessarily means that one has caused the other to happen. For example,the positive correlation between the shoe size and the IQ test among children.Does having big feet make a child smart? (maturity might be the factor that causes both:older children have big feet and are smarter than younger children) Another example,the positive correlation between education and earnings.Does higher education cause higher earnings?What about other factors such as motivation and abilities? Pitfalls and Hazards (Continued) The fallacy of composition is a second pitfall you should be on guard against.It arises due to aggregation. Oftentimes,when we go from the individual level of analysis to group-level analysis,there is a breakdown in the logic. In other words,what is true for the individual may not be true for the entire society. Example:Paradox ofThrift If one household saves money,they have more to spend later and their welfare rises in the future. But if all households do it, economic activity falls now and negatively impacts future welfare. Why Study Economics? Economics provides you with a new way of thinking. It involves; Thinking at the margin Opportunity Costs Incentives Economics also provides insights into the decision making process of consumers and producers By studying economics you will understand how and why economies grow . You will also become a more informed member of society. Why Study the Global Economy? We are now all participants in the global economy. The world has become much smaller,interconnected and interdependent. It’s important that we understand this environment we live in.