Micro Economics The Economic Model
Micro Economics The Economic Model ECON 211
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This 3 page Class Notes was uploaded by Addie Pearson on Friday February 5, 2016. The Class Notes belongs to ECON 211 at Clemson University taught by prof fiore in Winter 2016. Since its upload, it has received 27 views. For similar materials see Micro Economics in Economcs at Clemson University.
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Date Created: 02/05/16
MICRO ECONOMICS THE ECONOMIC MODEL Scarcity- constantly facing choices because of scarce time Crucial question: “how should scarce resources and goods be allocated?” Suppose lots of people move to G-vegas… - Should houses stores or roads be built? - Who tells everyone to do these things? THE MARKET! ( free market set-up) not the gov’t Economics provides a model of how resources are allocated (how people make these choices) 1. They optimize choosing the best option to meet their objectives 2. EQUILLIBRUIM results MICRO VS MACRO - MICO- studies CHOICE and its implications for price and quality in individual markets - MACRO- studies the performance of national economics and the policies that GOV’TS use to try and improve that performance Economic model is based on several fundamental principals 1. INCENTIVES MATTER- they’re everywhere! a. Ex. 1787: british gov’t hired sea captains to transport prisoners to austrailia; pay determined by # transported dead or alive. Most dead. b. Adam smith “They’re not doing it for you, it is for tier own gain” ie to make a living c. People respond to incentives in predictable ways d. Seatbetls: seatbelts invented and installed; crashes went up; “driving faster is safer!” resilt: more accidents, fewer driver deaths; more pedestrian deaths. Overall death toll remained the same. Do safer cars make NASCAR drivers drove more recklessly? YES 3.6% more e. Birth control: unwanted pregnancies: reduces the “price”/risk of sex = more sex, rates pretty much unaffected 2. GOOD INSTITUTIONS ALIGN SELF INTEREST W/ SOCIAL INTEREST a. When self-interest aligns w/ public interest, we get good outcomes; markets channel self-interest of millions; can be done under right conditions b. Markets DO NOT ALWAYS align self interest with social i. Incentives are too strong, eternal cost; pollution ii. Incentives are too weak, external benefits; flu shots 3. TRADE OFFS ARE EVERYWHERE! a. What started the revolution in food processing that made these extra calories cheaper? b. Labor force participation rate of women doubled between 1960 and 2000 c. Thus, the opportunity cost of women’s time has been rising, increasing the demand for easy to prepare food d. The food industry responded, just as economic analysis would predict. e. What would you expect to happen to college enrollment during a recession? i. Opportunity cost of going to college= wage you coud have been earning ii. Tuition / books = opportunity cost when paid for iii. Prediction: college enrollment up, unemployment up f. Why have Americans gained weight starting in the 60’s? i. Move from active to sedentary jobs ii. Less active lifestyles iii. Higher caloric intake due to the way food is prepared iv. Why are extra calories cheaper? Women joined workforce men incompetent and wont cook themselves a meal opportunity cost of home meals up so demand for easy to prepare food up food industry responds now we’re all fat. 4. RATIONAL PEOPLE MAKE CHOICES AT THE MARGIN a. Is sleep or studying ore important? ( hard to answer, bad question) b. Is one more hour of studying tonight more important than one more hour of sleep? 7 pm yes 1 am no c. Marginal=additional d. Making choices by comparing the EXTRA benefit to EXTRA cost of an action. That is, compare the MARGINAL BENEFITS to the MARGINAL COSTS e. What are some marginal costs of going to the Clemson basketball game in virgina? i. Gas, tickets hotel room, time stidying f. MARGINAL COST AND OPPORTUNITY COST ARE THE SAME g. Every decision involves both benefits and costs at the margin h. Marginal principal is: i. Marginal benefits > marginal costs, DO IT ii. Economics assumes people are rational. i. Can flying be “too safe?” i. Safety confers benefits (live longer) but achieving It entails cost (must give something up, seats, raise price, etc) ii. As safety rises, marginal benefits of additional safety decline iii. Amount of safety increases, both total and marginal costs providing safety rises iv. How much safety should we have (If MB > MC, do it) v. Can flying be too safe? (if MB < MC, yes) vi. ** badly worded question. At one point safety is so high that its not worth throwing more money at because the chance of anything happening is so low; wasted money that could go somewhere else **** “death by bureaucrat” reading**** Type I error: reject idea when it is true (case of meds, lives that could have been saved don’t live) Type II error: accept idea when it is false (case of meds, putting out a drug that will kill) **** we’re too cautious and it hurts more than help**** 5. TRADE MAKES PEOPLE BETTER OFF a. Both people involved in voluntary exchange are better of ( in expectation) b. Ex: I sell a student football ticket and sell it for $200. We both win! Buyer valuses the game at least $200, I value the game less than $200 c. “the power of trade” it increases production through specialization
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