Economics 200 Chapter 1&2 Textbook Notes
Economics 200 Chapter 1&2 Textbook Notes
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Chapter 1amp2 Notes Economics 200A Pollock 1 Chapter 1 Notes Basic Foundations Pnces Coordinate the market Indicate the willingness of consumers to forego other goods in order to obtain that good Demand actions of the consumers Supply actions of the producers Economics is a science that seeks explanations of events which take place in the real world 39 gtEconomic science should consist of positive statements ones that can be true or false NOT Normative statements statements which express a value judgement about whether a situation is desirable or undesirable Positive Science of Economics make predictions about the effects of changes in the various rules governing peope s actions and offer explanations of why the events we predict are likely to occur Social VS Physical Sciences all seek explanations of real events however social sciences analyze human behavior Physical sciences analyze objects Zero Sum Game One person gains another loses Positive Sum Game all parties stand to gain cooc r os as 0 or 39 39 u roe e Mutual interest is caused by mutual benefit and the mutual benefit we derive from production and exchange drives the economy Economics is interested in explanations and predictions Explanation an interpretation of events in terms of some more general proposition or law Economists use theories because the facts rarely if ever speak for themselves Theory consists of assertions or propositions we consider to be universally true Ad Hoc theories that explain only one thing Stay away from Ad Hoc Refutable Propositions statements or propositions that could in principle be wrong Note we use the term refutabe versus provable because it is impossible to prove theones Chapter 1amp2 Notes Economics 200A Pollock 2 Affirming the Consequent inferring the converse from the original statement Ex If A then B B Therefore A But many things could have caused B Note a thing is confirmed consistent with theory not proven Scarcity there are not enough of the items humans find desirable to satisfy everyone s wants Production deciding what to produce and how much Allocation deciding who gets the goods society produces Competition in the face of scarcity some people will get goods that others also desire Opportunity Cost a foregone highest value alternative resulting from some action or decision Cost is what a person must give up Cost means alternative cost Demand And Supply Demand the choices individuals make with regard to the goodsservices they consume Supply the choices we make with regard to the goods we producecontemplate for production Demand has two influences d element factor or subsystem that works as a bottleneck c p Ex Income prices time technology law health education 0l on an an no a to wit P b a Imle so we ASSUME they stay constant a 39 Q L3 lg g lndividuals mitigate the adverse consequence of their constraints If a restraint is relaxed people will exploit not ignore this change Law of Demand Consumers mitigate the damages of the higher price by decreasing the level of their consumption Demand Curve R I 6 65 UaLny Chapter 1amp2 Notes Economics 200A Pollock 3 Supply Supply Curve the relationship between the price of a good and the willingness of individuals to offer the good for sale 1Uampl39quot39 Hy Supply and demand curves are used to depict the activities of buying and selling in the market 5 MaurIlteT E uilijarium VH0 D uaun I397 J The intersection market equilibrium determines the price of goods and the quantity sold in organized markets Microeconomics small scale individual effectsconsequences of individual decisions Chapter 2 Notes The Theory of Consumer Behavior Marginal Analysis an examination of the additional benefits of an activity compared to the additional costs of that activity 21 Economic Behavior Ad Hoc made up to suit the facts in a particular case Behavioral postulates are about individual preferences even if economists only look at the consequences of the combined actions of these individuals Chapter 1amp2 Notes Economics 200A Pollock 4 22 Th Os39fUlod39e 1 T e Po tulates of Behavior 4 of them s ll am Rw lvlaaerate 1l e we assert that people can and do rank various and act on these preferences Ordinal VS Cardinal measurement altern tives FOSUIQ l e 2 lltjtllfl 9 lillilelfellflll etAl fry j gt greater access O goods 39FOSUqe3 T T p lll quotTllllli llCl to flt1ifrtllwlre fir 7 quotlflfl39lllllf T n quotVlrlle This nies the conc t of need gt if w re wiling to substitute tradeoff part of that good we don t NEED all of that good by definition Opportunity cost is the observable definition of the concept of value L Value determined solely by the willingness to give up other goods to get that good Example job wages are how much employers have to pay to get workers to J voluntarily accept risk Economics can t answer the normative question of evaluating life but suggests a relevant question what is the opportunity cost Z Jf S Marginal VS Total Values Marginal Value MV the amount a person would be willing to pay forego other goods in order to consume an additional unit of good X Total Value TV the amount a person would pay in order to consume all units of good X rather than none at all Note paying means giving up other goods Value is measured by the MAX amount of other goods we would be willing to give up in order to obtain the good l 7l17 CLl ill393l7 17 0J ll ll llC ll Of tlllltcalll t Basically the number of other o su additional units of a good becomes a tltllnll tllt t v ing to orego in order 1 C l 5 P Cillllllfllflll u oo s w re will less and less ll ll lijT ilflllllllciwlflfl l i j5llllll El tille lLvlw or lblrllllrltllllg lltllltvlllig lllflliwll tlllllll Example Buy the first cup of lemonade for 2 You aren t as thirsty so you won t pay as much for the second third or fourth cups 23 Marginal Value amp Demand Curves Total Value the sum of the respective marginal values Note Total values increase successively We continue to purchase goods until Price Marginal Value if PgtMV we wouldn t buy the good because we would have to pay more than we think it is worth Chapter 1amp2 Notes Economics 200A Pollock 5 Consumer surplus is the difference between what we would pay total value and what we actually DO pay when we make a purchase total expenditure Quantity varies inversely with price Law of Demand the quantity demanded of any good or the level of any activity pursued varies inversely with the price of that good or activity hold other things tastes consumer s income prices of substitutes constant Reservoction i r39 e NV 4 w hi H 9TV given K lt 9 3 e Consumer T M 39fj Reservation Price the consumer chooses not to consume this good at all basically the Yintersection on the graph 25 Market Demand Curves Economists interested in demand curves of many individuals versus a single individual The combined or market demand curve is simply the sum of the amounts each consumer wants to purchase demand at each price llte P5 y 4 A lai 7 fScr A My m Fefsan 5 Wpe Market Demanol CWVlt quot4 K39 339s 4 4 7 UOM4 to 395 Note The area under a market demand curve represents total value while the height at a given price represents the marginal value of the good Chapter 1amp2 Notes Economics 200A Pollock 6 26 The DiamondWater Paradox Why are diamonds so expensive and water so inexpensive if water is essential to life and diamonds are not W Demand Curves of DiamondsNater 0 e39 Dhfxmanols M H fU0U l I39n39 I z quotquot 7 Th The total value of water is therefore high indicated by the area under the demand curve producing a large amount of consumer surplus The diamondwater paradox has many applications such as when a commonly used good suddenly becomes scarce Someone proposes to share the burden equally by reducing all consumer s consumption by the same amount This doesnt work more on this later Comparable Worth the policy of comparing the wages paid in occupations that appear similar to an observer 27 Consumption Over Time 39 gthow one allocates income earned in different time periods to consumption he m lessthantheki Individuals attempt to sA people s consumption varies ll through borrowing and lending gt ncome The price of present consumption is the amount of future consumption a person has to give up in order to consume a unit of present consumption Example When a person s present consumption is very low their willingness to give up future consumption in order to eat better now is high The tendency to even out the flow of consumption is a consequence of the law of demand Permanent Income HypothesisLife Cycle Hypothesis an individual s consumption in a given time period is related mainly to his or her permanent level of incomelifetime earnings rather than income in that particular time period
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