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Econ 2005 week 1 of notes

by: Simone Race

Econ 2005 week 1 of notes ECON 2005

Simone Race


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first week of class notes
Principles of Economics
Steve Trost
Class Notes
25 ?




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This 3 page Class Notes was uploaded by Simone Race on Sunday February 21, 2016. The Class Notes belongs to ECON 2005 at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by Steve Trost in Spring 2016. Since its upload, it has received 9 views. For similar materials see Principles of Economics in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.


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Date Created: 02/21/16
ECON 2005 NOTES 1/25/16  Positive economics = “what is” o Tries to determine economic reality o Supported/rejected by evidence o True or false o Looking at relationships that actually exists  Normative economics = “what should be” o Opinion o Public policy (gov should do this)  Prescriptive economics= “tells people what they should do”  Gov tried to push dollar coins into economy, but credit cards were more attractive bc rewards so coins got deposited into bank to pay credit card bills  Don’t ignore unintended consequences o Ex. Child proof caps for medicine caused more access to drugs bc adults would leave caps of  Misconception: if 2 things happen together, one must cause the other  CORRELATION DOES NOT EQUAL CAUSATION (hd )  Fallacy of composition: mistakenly thinking that what’s best for one, is best for all (going early to buy concert tickets is smart, but not if everyone has the same idea)  Self selection: when people choose to be in a group being studied  “Sample selection bias”- when sample is not representative of entire population AP STATS  Economics is all about agents making decisions about what to do with scarce resources  Goods/services are scarce bc resources are scarce  Resources aka factors of production o Labor-human efort  Physical/mental efort  Time  Payment= wage (per hour) o Capital-human creations  Physical/human capital – how we build on labor, firms can invest by training  Payment= interest o Natural resources (land)  Renewable (wind, water)  Exhaustible (oil)  Payment= rent o Entrepreneurial ability-managerial skill  Talent, idea  Risk of operation  Payment= profit (greater risk, greater return)  Almost all goods and resources are scarce: amount that people desire exceeds amount available at zero price  “There are no free lunches” everything has a cost, give up something to get another (if someone else is paying, you are still giving up your time)  Biggest resource we own/supply is our labor  Households serve as consumers (demand goods/services) and resource owners (supply resources)  Firms (gov/rest of world) have 2 roles: demand resources and produce goods/services  Households vs firms-opposite roles, brought together by MARKETS  Product Markets- goods/services or “outputs” (Walmart)  Resource Markets- resources or “inputs”  Circular Flow Model shows “flow” of resources, products, income, revenue  Main interaction between Households and Firms  Econ heavily relies on models- meant to explain/reflect real world relationships  Model: formal statement of theory, usually math statement of presumed relationship between 2 or more variables  Model is simplified version of world used to make predictions or test relationships  Variable: measure that can change from time to time/observation to observation  The good models tell us over time what’s going on in the world, very useful  Economics relies on scientific method  Ceteris Paribus= “all else equal” 1/27/16  4 steps of scientific method o Identify question and define relevant variables o Specify assumptions  Assume people are self interested and rational  Self interested = maximizing their own happiness or “utility” (NOT SELFISH)  Rational= try to make the “best” choices- actually think things through  People will make the best choice for themselves given the available information  Maximize expected benefit with given cost  Minimize expected cost for given benefit o Formulate a hypothesis  Theory about how key variables relate to each other o Test hypothesis  Best bet is to look at past experience since you can’t do experiment in a lab technically  Must learn to ignore SUNK COSTS- costs in the past that can’t be changed and shouldn’t afect future economic decisions  Marginalism: process of analyzing additional or incremental costs or benefits arising from a choice or decision  Time is the biggest sunk cost   Optimizing in “Levels”- all one or all another (taco bell or waffle house)  Optimizing in “Diferences”- choice on the “margin” (already at taco bell, do I want another taco)  This class focuses on “marginal” choices bc simpler  Absolute advantage: to be “absolutely” better at something  Comparative advantage: to be “comparatively” better at something  If we specialize in what we are good at then as a group, we can produce more  Trading with each other can make everyone better of as well  Early barter economies are based on this, and later money made the system easier  Division of labor- when each person specializes in one small part of production process  Specialization leads to increased productivity  Downside of specialization: repetitive, tedious, people become like robots (and can be replaced by robots)


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