Week One Notes--Introduction and Beginning Chapters
Week One Notes--Introduction and Beginning Chapters Econ-UA 1
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This 6 page Class Notes was uploaded by Cindy Notetaker on Sunday August 14, 2016. The Class Notes belongs to Econ-UA 1 at New York University taught by Gerald McIntyre in Fall 2016. Since its upload, it has received 599 views.
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Date Created: 08/14/16
September 6th, 2016 Introduction Federal Government Debt --GDP: measure of the total income measured in the US economy --more spending without any taxes = further in debt (if this is what future president proposes, debt will rise) -governments will HAVE to pay back that back, and do so by increasing taxes to finance debt --by 2050, likely have much higher taxes --on other hand, we have benefits Income Inequality --at current period, 18% of share of national income in top 1% (highest it has been in many years) --why did it drop in the 1930s? Why did it increase after the 1980s? -growth of income since 1980s: 50% more income in 1985 than in 1979 and has only increased since -on the other hand, rest of income earners were below the "zero" = INCOME FELL -by 2013, 188% increase for top 1%, and lowest quintile only 18% increase WHY did this happen??? Hypothesis: income inequality is due to differences in education --guess: graduates with degrees get paid more than those who are only high school graduates --based on graphs, it fails to refute the hypothesis (aka the hypothesis still stands) The Key Method of Economics - -Systematic observation and measurement An interpretation of data: we measure rates, observed over time the government budget defect, income inequality, how income has grown - -Formulation of a hypothesis We do this by using a model, can be simple or complex; going to college and pursuing a degree can come out at income inequality - -Test the Hypothesis We do this with new data and assess it...then we either reject or fail to reject If there is a rejection then we modify --Modification or rejection of the hypothesis **exactly like the scientific method** THE METHOD OF ECONOMICS IS THE SCIENTIFIC METHOD Economics is a Social Science What are some other alternative models/guesses for the recent rise in income inequality in the US? - globalization: jobs being outsourced overseas, only people at top benefiting from the growth, closing shops in the United States (this would only benefit owners) - deregulation: loosening of laws and therefore easier for the big guys to get more money -cost of living vs. taxes: could try figuring out inflation, what are taxes, how does inflation and taxation affect different groups of people -technology: sometimes known as "skill biased technological change"; those who are not technologically skilled are not given those advantages Different Kinds of Economics - -Microeconomics vs Macroeconomics -Micro: small; studies the individual household, business firm or market, important crucial MICRO decisions on your life, individual markets (like housing market, stock market, oil market) -Macro: the BIG picture; studies the entire US economy; unemployment recessions, expansions, rapid growth, inflation, monetary policy (tools government can use to control the money supply), fiscal policy (tax spending policies, etc...) - -Positive and Normative Economics -positive: descriptive, describing income shares, growth, education impacts, etc...; it makes a claim about how the world is --ex. "minimum wage laws CAUSE unemployment" (speaking like a scientist and making a claim) -normative: prescriptive (aka doing something about it); it claims about how the world SHOULD be; differences in views and so prescriptive statements are different --ex. "the government SHOULD raise the minimum wage" Economics uses models to understand complex reality -simplifies the world so we can understand it; helps us ignore what's unimportant and focus on what IS important -all models are "wrong", but some models are useful: models are a HUGE simplification, but some give us understanding Example: a map is a kind of model -models are built for a purpose but don't provide EVERYTHING Chapter 1 Terms: **terms will be in RED** scarcity: society has limited resources and therefore cannot produce all the goods and services people wish to have economics: how society manages its scarce resources economists: study how people interact with one another by means of assessing and examining multiple factors (prices, quantity, growth in average income, etc...) efficiency: society is getting the maximum benefits from its scarce resources equality: benefits are distributed evenly amongst all of its members opportunity cost (OC): what you give up to get a certain item; the value of the NEXT BEST alternative rational people: those who thoughtfully and purposefully do the best they possibly can to achieve their goals given the available opportunities marginal change: a small adjustment (in increments) to an existing plan of action incentive: something the provokes someone to act market economies: decisions are made by millions of firms and households invisible hand: assuming that an economy can work well in a free market where everyone works for his/her own interest property rights: the ability of an individual to own and exercise control over scarce resources productivity: the quantity of a good or service produced from each unit of labor (hours, days, etc) inflation: an increase in overall levels of the economy TEN PRINCIPLES OF ECONOMICS (7 ARE MENTIONED IN LECTURE) -Principle 1: People face trade offs -this means that we can't always get everything we want/like, and will have to sacrifice one over the other -it's not just about money and usually never is -we live in a world of limits and have to make choices due to scarcity -ex: you start making choices as soon as you wake up in the morning when you're alarm goes off (like deciding to ignore the alarm and sleep longer but rush the entire day or immediately get up, lose some sleep but be punctual) --Principle 2: The cost of something is what you give up to get it (opportunity cost) -making decisions when faced with trade offs requires comparing costs and benefits of all the different outcomes -opportunity costs will vary from person to person because people value things differently and costs are ultimately subjective -ex: going to college--> benefits include getting an education and better opportunities, but costs are tuition and especially TIME -be aware of the opportunity costs that accompany each possible decision total costs=explicit costs vs. implicit costs total costs=explicit costs vs. opportunity costs social opportunity cost --with fixed resources, more government spending on one program means less spending on another program efficiency vs. equality --efficiency means getting the MOST out of our resources --equality means distributing our prosperity more equally to our society **the two often come in conflict, one becomes the other's OC, and therefore reduces incentives** --Principle 3: Rational people think at the margin"the edge" -rational people understand that life is hardly ever this or that, black or white, but rather a mixture or shades of gray --ex. when it's exam time, you don't either blow off studying or study 24/7, but rather decide as to whether or not you're going to spend an extra hour here and there -rational people make decisions by comparing marginal costs vs marginal benefits (marginal change) if MB>MC, then a rational person would want more of that if MB<MC, then a rational person would do less if MB=MC, then a rational person is fine with the circumstances --this is also known as the optimal stopping point (optimality point) -takes an action IF AND ONLY IF the marginal benefit of the action exceeds the marginal cost --Principle 4: People respond to incentives -they are crucial in analyzing how markets function -many policies change costs or benefits people face, therefore altering incentive -benefits are like rewards; costs are like punishments --therefore, people decide according to marginal benefits and costs --ex. when oil prices rise, quantity demanded of oil falls (law of demand); people decide to drive hybrids, drive less, take public transportation, etc... -policy makers should always consider the incentives that every policy makes NOTE: not all people respond to every incentive all the time **principles 1-4 discuss how people make decisions** --Principle 5: Trade can make everyone better off -rather than have one country beat the other in trade, it benefits both (or multiple) sides/countries -it allows an individual or a country to specialize in what they are best at (whether it be sewing, farming, etc) -by trading, people can buy a greater variety of goods and services at a lower cost --Principle 6: Markets are usually a good way to organize economic activity -many countries have developed market economies, rather than a central planner controlling everything -although decentralized and self-interest decisions, has proven to successful in organizing government activity -"invisible hand" helps guide economy --Principle 7: Governments can sometimes improve market outcomes -needs to enforce rules that are key to market economics in order for the "invisible hand" to work -must encourage institutions to enforce property rights over the things we produce, by means of laws, police, courts ex. A restaurant won't serve meals unless they know that they will get paid before customer leaves **principles 5-7 discuss how people interact with one another** --Principle 8: a country's standard of living depends on its ability to produce goods and services -variation in living standards (like annual income and luxuries) are based on a country's productivity -the larger the quantity of goods and services produced, the higher the standard of living -the growth of a nation's productivity determines the growth rate of its average income -productivity influences public policy --Principle 9: prices rise when the government prints too much money -too much money printed = inflation -the larger the quantity of money that is circulating, the larger the decrease in value of the money --Principle 10: society faces a short-run trade off between inflation and unemployment -an increase in money printed leads to an increase in overall spending, aka an increase in demands for goods and services -an increase in demands causes firms to raise prices, but also encourages firms to hire more workers to meet those demands -hiring more workers = lower unemployment -keep in mind this is SHORT-RUN: that means changes in policies that affect unemployment and inflation are within 1-2 year periods **principles 8-10 discuss how the economy works as a whole** TERMS: circular flow diagram: simplifies the workings of an economy into two types of decision makers-firms and households; very useful in gaining basic understanding factors of production: inputs in goods or services (labor, land, capital, etc) market for goods and services: households are buyers, firms are sellers markets for the factors of production: households are sellers, firms are buyers **production possibilities frontier (PPF)**: a graph that shows various combinations of output (goods/services) that the economy could produce given its resources/factors of production --when an economy is EFFICIENT, that means that it making the most of the scarce resources made available to it -aka, points ON the PPF frontier --when an economy is INEFFICIENT, that means that, due to some sort of reason, the economy is not meeting its full potential with the scare resources it is given and producing less -aka points INSIDE the PPF
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