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Econ 252: Chapter 2-4 Notes

by: Zach Weinkauf

Econ 252: Chapter 2-4 Notes ECON 252

Marketplace > Purdue University > Economcs > ECON 252 > Econ 252 Chapter 2 4 Notes
Zach Weinkauf

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About this Document

These notes cover Chapters 2 through 4 of lecture and book notes.
Andres Vargas
Class Notes
Economics, Macroeconomics
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This 4 page Class Notes was uploaded by Zach Weinkauf on Wednesday February 10, 2016. The Class Notes belongs to ECON 252 at Purdue University taught by Andres Vargas in Fall 2016. Since its upload, it has received 50 views. For similar materials see Macroeconomics in Economcs at Purdue University.


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Date Created: 02/10/16
Chapter 2: Economic Methods and Economic Questions 2.1 – The Scientific Method  Scientific Method – name of the ongoing process that economists, other social scientists, and natural scientists use to: o Develop models of the world o Test those models with data  Model – simplified description, or representation, of the world. Sometimes, economists will refer to a model as a theory. o Is an approximation  Data – facts, measurements, or statistics that describe the world. o Empirical Evidence – set of facts established by observation and measurement.  Hypothesis – predictions that can be tested with data.  Mean – sum of all the different values divided by the number of values. 2.2 – Causation and Correlation  Causation – occurs when one thing directly affects another through a cause- and-effect relationship.  Correlation – means that there is a mutual relationship between two things. o Variable – factor that is likely to change or vary. o Positive – implies that two variables tend to move in the same direction. o Negative – implies that two variables tend to move in the opposite direction. o Zero – when variables have movements that are not related.  Reasons why correlation may not imply causality: o Omitted variables – something that has been left out of a study that, if included, would explain why the two variables in the study or correlated. o Reverse Causality – occurs when we mix up the direction of cause and effect.  Experiment – controlled method of investigating causal relationships among variables.  Randomization – assignment of subjects by chance, rather than by choice, to a treatment group or control group.  Natural Experiment – empirical study in which some process – out of control of the experimenter – has assigned subjects to control and treatment groups in a random or nearly random way. 2.3 – Economic Questions and Answers  Good Questions all have two properties: o Address topics that are important to individual agents and/or our society. o Can be answered. Chapter 3: Optimization: Doing the Best You Can 3.1 – Two Kinds of Optimization: A Matter of Focus  Economists believe that optimization describes most of the choices in life.  Optimization in Levels – calculates the total net benefit (total benefit – total cost) of different alternatives and then chooses the best alternative.  Optimization in Differences – calculates the change in net benefits when a person switches from one alternative to another and then uses these marginal comparisons to choose the best alternative.  Behavioral Economics – analyzes the economic and psychological factors that explain human behavior. 3.2 – Optimization in Levels  Optimum – the best feasible choice.  Three steps of optimization in levels: 1. Translate all costs and benefits into common units (ex. Dollars per month). 2. Calculate the total net benefit of each alternative. 3. Pick the alternative with the highest net benefit.  Comparative Statics – comparison of economic outcomes before and after some economic variable is changed. 3.3 – Optimization in Differences: Marginal Analysis  Marginal Analysis – cost-benefit calculation that studies the differences between a feasible alternative and the next feasible alternative. o Will never change the answer to “what is optimal?” but it will change the way you think about optimizing.  Marginal Cost – extra cost generated by moving from one feasible alternative to the next feasible alternative. o Option 2 Cost – Option 1 Cost = Marginal Cost  Principle of Optimization at the Margin – an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.  Three steps of optimization in levels: 1. Translate all costs and benefits into common units. 2. Calculate the marginal consequences between moving between alternatives. 3. Apply the Principle of Optimization at the Margin by choosing the best alternative with the property that moving to it makes you better and moving away makes you worse. Chapter 4: Demand, Supply, and Equilibrium 4.1 – Markets  Market – group of economic agents who are trading a good or service, and the rules and arrangements for trading.  Market Price – price at which sellers and buyers conduct transactions.  Qualities of a Perfectly Competitive Market: 1. Sellers all sell an identical good or service. 2. Any individual buyer or an individual seller isn’t powerful enough on his or her own to affect the market price of that good or service.  Price-taker – buyer or seller who accepts the market price. 4.2 – How do Buyers Behave?  Quantity Demanded – amount of a good that buyers are willing to purchase at a given price.  Demand Schedule – table that reports the quantity demanded at different prices, holding all else equal. o Holding all else equal implies that everything else in the economy is held constant.  Demand Curve – plots the quantity demanded at different prices.  Law of Demand: o QD (quantity demanded) rises  Price falls o QD falls  Price rises  Willingness to Pay – the highest price that a buyer is willing to pay for an extra unit of a good.  Diminishing Marginal Benefit – as you consume more of a good, your willingness to pay for an additional unit declines.  Aggregation– process of adding up individual behaviors.  Market Demand Curve – sum of all individual demand curves of all potential buyers.  Causes that change Demand 1. Changes in tastes and preferences a. Demand Curve Shifts – when QD changes at a given price. b. Movement along demand curve – if good’s price changes and demand curve hasn’t shifted. 2. Changing Income or Changing Wealth a. Normal Good i. Income rises  QD rises ii. Income falls  QD falls b. Inferior Good i. Income rises  QD falls ii. Income falls  QD rises 3. Changing Availability and Prices of Related Goods a. Substitutes i. Price Pepsi falls  QD of Coke falls b. Complements i. Price of Gas falls  QD of Cars rises 4. Changing in the Number and Scale of Buyers – Population 5. Changing Buyers’ Beliefs about the Future a. Price of gas in future falls  QD of gas now falls 4.3 – How do Sellers Behave?  Quantity Supplied – amount of a good or service that sellers are willing to sell at a given price.S  Supply Schedule – table that reports the quantity supplied at different prices, holding all else equal.  Supply Curve – plots the quantity supplied at different prices.  Law of Supply: o Price rises  QS (quantity supplied) rises o Price falls  QS falls  Willingness to Accept – the lowest price that a seller is willing to get paid to sell an extra unit of a good.  Market Supply Curve – sum of the individual supply curves of all the potential sellers.  Causes of Supply Curve shifts: 1. Changing the price of inputs used to Produce the Good a. Input – good or service used to produce another good or sevice. b. Supply Curve Shifts – supply increases  shift right c. Movement along the supply curve – good’s own price changes but SC doesn’t shift. 2. Changes in the technology used to Produce the Good 3. Changes in the Number and Scale of Sellers 4. Changes in Sellers’ Beliefs about the Future 4.4 – Supply and Demand in Equilibrium  Competitive Markets converge to the price at which QS is equal to QD.  Competitive Equilibrium – the crossing point of the supply curve and the demand curve.  Competitive Equilibrium Price – equates QS and QD.  Competitive Equilibrium Quantity – quantity that corresponds to the competitive equilibrium price.  Excess Supply – market price is above equilibrium price, QS exceeds QD.  Excess Demand – market price is below competitive equilibrium price, QD exceeds QS.


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