ECON 2306 Roger Wehr
ECON 2306 Roger Wehr ECON 2306 - 002
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This 4 page Class Notes was uploaded by Asiah Notetaker on Wednesday February 3, 2016. The Class Notes belongs to ECON 2306 - 002 at University of Texas at Arlington taught by Professor Wehr in Spring 2016. Since its upload, it has received 178 views. For similar materials see Microeconomics in Economcs at University of Texas at Arlington.
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Date Created: 02/03/16
The Fundamental Principles of Economics 1. Scarcity (limited/fixed in supply ) is inescapable 2. Risk is unavoidable 3. Therefore, all persons must make choices (opportunity cost—the next best choice) a. Unlimited wants/fixed resources 4. Incentives matter 5. People generally act in their own self-interest a. Adam Smith—Wealth of Nations; “Invisible Hand” motivated by self- interest 6. There is often more than one way to produce things a. Cobb-Douglass Production Function i. Q=f(K,L) ii. Output=f(capital, labor) b. Can produce things in capital intensive or labor intensive i. In US, typically cheaper to produce in capital goods ii. Why is Gas more expensive than Orange Juice even though Gas is more complicated to make? (bc Gas is a capital good) c. Where you produce: productivity relative to wage rate 7. Voluntary exchange is mutually advantageous 8. It is wealth, not poverty which has causes a. Focus on why nations become rich and not why they become poor b. What creates wealth? Specialize and Trade (not because they have a lot resources) 9. Public policies have primary effects & secondary effects, some good, some bad a. Primary effects: intended b. Secondary effects: unintended consequences c. Examples: i. “Path to hell is paid with good intentions” ii. In Indonesia: if you save a drowning woman, you’ll be put to death 1. Telling woman in Indonesia to learn how to swim because no one will save you---results? Woman in Indonesia rarely drown iii. ↑Minimum Wage---helps lower-income people, but ↑unemployment iv. Seatbelt law---↓traffic fatality, but ↑traffic accidents 10.In the end, economic laws tend to prevail Topics studied under microeconomics Individuals (maximize utility/satisfaction) Firms/Entrepreneurs (maximize profit) Politicians (maximize votes/power) Intelligence—comes from “inter” and “lego” meaning “between” and “to choose” 2 Most Noble Profession? Plumber/AC Repair (“menial” jobs that are often overlooked); Manager of McDonalds (promoting trade btwn nations) Economics Overview Economics: o a social science (lack of experimentation in the macro level for it to be a hard science), o which attempts to explain how individuals, firms, & nations allocate (how to distribute) o scarce resources (limited ‘inputs’ or ‘factors of production’) o among competing interests (opportunity cost) Positive vs Normative o Positive: fact, “what is” o Normative: value judgment, “what should” or “ought to be” Macro vs Micro o Macro (Sectors of Macro) aggregate (sum, total, whole) π=inflation o Micro (Levels of Micro) individuals, entrepreneurs, firms, industries politicians and voters π=profit = TR (total revenue) – TC (total cost) = P (price) * Q (quantity) – ATC (avg total cost) * Q (quantity) = Q(P-ATC) *fun fact: P > AVC (keep operating) not necessarily when P < ATC Three Questions o What? --- Allocation of inputs (resources) o How? --- Production (capital or labor intensive) o For whom? --- Allocation of outputs (products, goods) Four Systems o Capitalists (free market/Laissez-faire)---Price controls o Command and Control---Government controls o Compromise---Price AND Government both control o Customary (traditional)---Tradition (everything by tradition) Four Factors of Production & Their Respective Payments o Land---Rent o Labor----Wage o Capital---Interest National Income (for o Entrepreneurship---ProfiMACRO) Circular Flow Diagram---movement of cash and goods/services Six Economic Warnings---choose one with less variables 1. Post hoc ergo propter hoc ‘fallacy (after this ∴ because of this fallacy) (time series data) 2. Fallacy of Composition---what works for one person doesn’t mean it’ll work for group 3. Correlation ≠ Causation (cross sectional data) 4. Violation of “ceteris paribus” (all else equal) 5. Inclusion of an Irrelevant Variable 6. Exclude a Relevant Variable