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Intro to Econ Week 1

by: Katie Truppo

Intro to Econ Week 1 Econ 201

Katie Truppo
GPA 3.4
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Intro, Scarcity, Opportunity Cost
Into Economics: Survey Course
Kenneth Baker
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This 6 page Class Notes was uploaded by Katie Truppo on Saturday August 20, 2016. The Class Notes belongs to Econ 201 at University of Tennessee - Knoxville taught by Kenneth Baker in Fall 2015. Since its upload, it has received 8 views.


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Date Created: 08/20/16
Intro I What is connection? Solomon and David Lee Roth used “Game Theory” a branch of economics Game theory: study of how people behave in strategic situations Used in political science, sports, government, philosophy, etc. Scarcity Economists see a 2 part irreconcilable problem with the world: Human wants are unlimited More is always better (clothes, clean environment, better education) Unfortunately, our ability to satisfy these wants are limited Fundamental economic assumption Services are scarce Scarcity: if everything were free, there wouldn’t be enough to go around Resources (factors of production, inputs): the inputs used to make the goods/services that individuals and society desires Raw materials (land) Labor (time of workers) Physical Capital (human made goods) Human Capital (what you accumulate, education) Entrepreneurship (organize others inputs into an output) Time is scarce Income/revenue is scarce Government funding is scarce Resources are scarce, as a result we cannot make/give everybody all that they want *slide 7 powerpoint Goods vs. Services Goods: tangible product New car Services: intangible, usually require interaction with customer Mechanic to change oil U.S. Economy Goods: 20% Services: 80% 3 Questions for society WHAT goods/services should we make How many HOW should we make them What is the most efficient way HOW should we allocate the goods/services we made Who gets Ford, who gets Bentley “The Economic Pie" Pizza is goods, how can we make pie as big as possible How do we split pie up Normative vs. Positive Language Normative Concerned with how world should be Centered around moral, ethical and subjective beliefs The government should raise minimum wage Positive How the world is Factual, testable beliefs If the government increased minimum wage, it would drive up unemployment by 2% Microeconomic vs. Macroeconomics Microeconomics The study of choices facing individuals, business and even government and their interactions Macroeconomics Study of how the aggregate of individual decisions affect an entire economy Microeconomics 3 Main "Economic Agents" Households Firms/Industries Governments Studies Behavior and choices individually, also studies the interaction between the three groups Macroeconomics Level of Production How can we measure the entire country’s total level of production? How is the level of production related to income? To unemployment? Standard of Living What effects a country’s standard of living? the average level of consumption of goods/services enjoyed by the population Cost of Living What is the “cost of living” and how is it measured? Government Policies How can Federal Reserve of Government policies affect you? The Methodology of Economics 1. Identify an issue 2. Simplify using assumptions 3. Develop a working mode/theory 4. Collect data and test the model Assumptions: serve to simplify the world Complexity is the biggest problem economics face Therefore, critical first step involves simplifying so that we focus inky on those aspects critical to the particular problem Subjective process: can lead to disagreements between economists Common economic assumptions People (consumers) behave to maximize their happiness (utilities) Businesses (firms) behave to maximize their profits Consumers/firms make well informed rational decisions Theories: generalized casual relationships between variables Often based on observation, educated guesses or experiences Attempt to: Explain past phenomenon Predict future occurrences Pitfall! Don’t confuse correlation with causation! Just because x happens, doesn’t mean y caused it Models: Quantitative representation of the issue being examined Models can represent consumers, business, government Supply and demand is most important economic model Theory says consumers buy more coffee when prices fall, model says they purchase 8% more when prices fall 5% Economics Definitions The social science that studies production, distribution, and consumption goods The study of how society chooses to allocate its scare resources to the production of goods and services in order to satisfy unlimited wants The study of how society manages its scarce resources The study of how people make choices under conditions of scarcity and the results of those choices for society Bottom Line: Things are scarce (time, money, resources) so we need to do the best with what we have to work with Allocating resources to their highest value use Getting the biggest bang for your buck Stretching our limited resources as and as fairly possible What Do Economists Do? Law, Pollution, Health Care, Sports, Taxes, etc. Work in academia, private sector, public sector Intro II Economics is about decision making Everyone should weigh costs and benefits properly when making decisions Ex. Going to college or getting full time job after high school Benefits: What do you gain by saying “yes" Costs: What do you lose when saying “yes" Economists like to think this is their biggest contribution Opportunity Cost: The value of the next best foregone opportunity whenever a decision is made Margin Decisions: One more or the next one or one additional (small decisions) Most decisions are small, incremental decisions 1 more pair of shoes? Study for another hour? People Respond to Incentives Since, People think rationally Then, Small changes can be enough to alter people’s decisions Ex: Cheating, sales If marginal benefit > marginal cost YES If marginal benefit < marginal cost NO Production Possibilites Frontier (PPF) Model PPF: economic model that shows the maximum combination of goods/services that can be prodcuced given available resources and technology Useful to show: The consequence of scarcity Tradeoffs from making decisions (costs/benefits) Efficient Points: all points on PPF Inefficient Points: all points inside PPF Unattainable Points: all points outside PPF (scarcity) Law of Increasing Opportunity Cost: As we produce more of one good, we must sacrifice more and more of another good HW Question A: Assumption of the sources used in the production of the goods, PPF 1 assumes resources are equally suited to goods 1 and 2, PPF 2 assumes sources are specialized Economic Growth: Population grows, more workers, increases capitol HW Question: Capitol Goods: Physical capitol will help produce more consumer goods Consumer Goods: Goods and services that people like to consume Society as a whole must decide how much of its resources to devote towards capitol goods (investment) and how much towards consumer goods (enjoyment now)


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