Economics: Foundations and Models
Economics: Foundations and Models ARE 1150
Popular in Principles of Agriculture & Resource Economics
Popular in Agricultural & Resource Econ
verified elite notetaker
This 4 page Class Notes was uploaded by Caitrín Hall on Tuesday February 2, 2016. The Class Notes belongs to ARE 1150 at University of Connecticut taught by Emma Bojinova in Spring 2016. Since its upload, it has received 63 views. For similar materials see Principles of Agriculture & Resource Economics in Agricultural & Resource Econ at University of Connecticut.
Reviews for Economics: Foundations and Models
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/02/16
Chapter 1 Economics: Foundations and Models Scarcity – our resources are limited while wants are not Economics – the study of the choices consumers, business managers, and government officials make to attain their goals given their scarce resources Economic models – simplified versions of reality used to analyze real-world economic situations 1.1 Three Key Economic Ideas Market – a group of buyers and sellers of goods/services and the institution by which they come together to trade 1. People are rational. We make decisions based on the information available to us. The outcome may turn out unexpectedly, but that does not make it an irrational decision. 2. People respond to economic incentives. Incentives are intended either to move people away from purchases or to draw more people into purchases. Example 1: higher taxes on cigarettes are intended to decrease purchases. Example 2: by reducing costs of obesity, health insurance may give people an economic incentive to gain weight 3. Optimal decisions are made at the margin. Economists reasons that activity should continue until marginal benefits equal marginal costs (MB = MC) Marginal analysis – analysis that involves comparing marginal benefits and marginal costs Economic reasoning – making decisions on the basis of costs and benefits o There are usually monetary and opportunity costs vs. benefits o Example: It costs money to attend class, and time spent travelling to and attending class takes away from time that could be spent doing something possibly more productive. These are costs. Costs and benefits are subjective!! 1.2 The Problem That Every Society Must Face Trade off – the idea that because of scarcity, producing more of one good or service means producing less of another good or service; trade-offs are made when answering the following questions: 1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced? Opportunity cost – highest-valued alternative that must be given up to engage in an activity o Monetary & time costs o Choosing the best option means sacrificing only your second best option—not all other possible activities! o Ranking your alternatives helps make a decision Centrally Planned vs. Market Economics Centrally planned economy (pure command)– government decides how economic resources will be allocated o Full control of central planner o Common resources o What is produced? What the government deems necessary o How is it produced? Government determines capitol/labor intensity o Who gets output? Equal distribution, “to each according to their need” o Ex) Cambodia, China, Cuba, North Korea o (Ideal) motivation: Communal good Market economy (pure market)– decisions of households and firms interacting in markets allocate economic resources o No government intervention o Laissez-Faire o Allocation and choices left solely to market o Private resources o Determined by Market Price Mechanism (invisible hand) o Capitalism o Free markets o What is produced? What people are willing and able to buy o How is it produced? Efficiently & profit maximizing o Who gets output? Based on ability, effort, and inheritance/wealth o Motivation: Self interest Profit Wealth “Mixed” economy o Minimal government role in addition to interaction of buyers and sellers o Government plays significant role under certain circumstances Efficiency and Equity Productive efficiency – good or service produced at lowest cost Allocative efficiency – production is in accordance with consumer preferences; each good is produced until marginal cost outweighs benefit Voluntary exchange – occurs in markets when both the buyer and seller are made better off by the transaction Equity – fair distribution of economic benefits Trade-off between efficiency and equity (often faced by government policymakers) 1.3 Economic Models Steps to develop a model: 1. Decide on behavioral assumptions 2. Formulate testable hypothesis 3. Use economic data to test hypothesis 4. Revise model 5. Answer future related questions with revised model The Role of Assumption We reduce complexity to better analyze economic issues Economists assume that consumers will buy goods and services that maximize their well-being or satisfaction Forming and Testing Hypotheses Economic variable – something measurable that can have different values, such as incomes Scientific method – the process of developing models, testing hypotheses, and revising models Normative and Positive Analysis Positive analysis is concerned with what is Normative analysis is concerned with what ought to be; cannot be proven or disproven Economics is about positive analysis (measures costs vs. benefits) Economics as a Social Science Studies human decision-making behavior in every context 1.4 Microeconomics and Macroeconomics Microeconomics – the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices Macroeconomics – the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth A Preview of Important Economic Terms Entrepreneurs operate businesses, decide what goods and services to produce and how, and risk their own funds to do so. Invention is the development of a new good or process for making something, while innovation is the practical application of an invention. Technology is the process a firm uses to produce goods and services; depends on skill of managers, training of workers, and the speed and efficiency of equipment. Firm, company, or business are used interchangeably to mean and organization that produces a good or service. Goods are tangible merchandise. Services are activities done for others. Revenue is the total amount received for selling a good or service o Price per unit multiplied by number of units sold Profit is the difference between revenue and costs. Households consist of all persons occupying a home; suppliers of factors of production used by firms and governments Factors of production or economic resources are labor, capital, natural resources (land), and entrepreneurial ability. Financial capital includes stocks and bonds issued by firms, bank accounts, and holdings of money. Physical capital includes manufactured goods that are used to produce other goods and services. * This is the type of capital referred to in economics. * Human capital refers to the accumulated training and skills that workers possess.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'