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Microeconomics 251 Week 1 notes

by: Hojun Notetaker

Microeconomics 251 Week 1 notes ECON 25100

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Hojun Notetaker

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This is from my week 1 Microeconomics honors lectures.
Kelly Blanchard
Class Notes
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This 5 page Class Notes was uploaded by Hojun Notetaker on Wednesday August 24, 2016. The Class Notes belongs to ECON 25100 at Purdue University taught by Kelly Blanchard in Fall 2016. Since its upload, it has received 40 views. For similar materials see Microeconomics in Business/Economics at Purdue University.

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Date Created: 08/24/16
Hojun Boo ECON 25100H Microeconomics  Week 1 Notes: Summary: What is Economics? Economics is a social science that studies the choices we make as we cope with scarcity and the  incentives that influence and reconcile our choices. Scarcity: Our inability to get everything we want. Incentives: Is a reward that encourages an action or a penalty that discourages one. Example of  incentives is prices. If the price of a good like a car is too high, there will be less incentive to buy a car then the same car at a lower price which will cause more incentive to buy.  Due to scarcity we have to make choices because we can’t get everything we want.  Make sure you know the difference between Microeconomics and Macroeconomics!  Microeconomics: When studying Microeconomics, you are studying choices that are made by  individuals and businesses make, and how they affect the business, the market, and the  government. Macroeconomics: studies a countries economy and not just one countries’ economy, but the  global economy. Deals with topics like unemployment rate, GDP, interest rates, The Federal  Reserve, and the appreciation or depreciation of a currency in terms of another and the quantities countries should sell their currency. We are going to stick with Microeconomics! Before we dive into economics there are two big questions that basically summarize the whole  concept of economics. 1. How do choices determine what, how, and for whom goods and services are made for? 2. Do our self­interests also help social interest? What are Goods and services? Goods and services: Goods and services are objects people value and produce to satisfy their  wants. Goods: Physical objects like, computers, radios, cars, etc.  Services: Tasks performed for people like, plumber, teachers, emergency services, etc. In order to use Goods and services we need resources and in economics we use four  categories of resources. 1. Land 2. Labor 3. Capital/human capital 4. Entrepreneurship  What does these four categories mean? Land: Land deals with anything found in nature. If it is nature, then it is part of the land category. This includes animals, minerals, rocks, etc. Labor: The work time and effort that people devote to producing Goods and services.  Capital: Don’t let this green capital lead you to think capital is just money!!! You are not wrong  yet you are not right. When we talk about capital, we are talking about human capital, which is  the process of people obtaining the knowledge and skills needed to do the job. Examples are on­ job training, schools, and other work experience.  Capital: Also deals with the things that actually create the Goods and services like, tools,  instruments, machines, and factories.  Entrepreneurship: This person helps organize the other three factors of production. Entrepreneurs make new ideas on production and business decisions. All of these resources or factors are consumed by us, the individuals. What does these factors give you?  Land earns rent  Labor earns wages  Capital earns interest   Entrepreneurship earns profit Now to the second question. Do choices made for self­interest also help societies interests? What is self­interest and what is social interest? Self­interest: Is making the choices that is the best one available to you Social interest: The best possible choice for society. What do economists want? Efficiency! Efficient: something that can’t be approved without hurting someone.  How Economist think: Economists use six ideas of thinking. 1. A choice is a tradeoff 2. People make rational choices by comparing benefits and costs 3. Benefit is what you gain from something  4. Cost is what you must give up to get something  5. Choices respond to incentives  Due to scarcity we need to make choices and we must think about our choices as tradeoffs. Tradeoffs: an exchange giving up one thing to get something else. Economists calls the choices we make as rational choices. cost. Benefit: The gain or pleasure that it brings and is determined by preferences by what a person  likes and dislikes and the intensity of those feelings. Opportunity Cost: The highest valued alternative that must be given up to get it. Example of Opportunity Cost is college vs staying at home. The opportunity cost of going to college is losing the money you could be making by staying as  home. Also by staying at home you don’t have to pay tuition or books, but you lose the chance to get a higher paying job by going through college. How much? Choosing at the Margin Margin: Comparing benefit and cost as time goes on. Marginal Benefit: Benefit that arises from an increase in activity Marginal Cost: The opportunity cost of an increase in an activity. If the marginal benefit of the good is greater than the marginal cost, you should continue to  consume that good. If marginal benefit is less, then marginal cost then you should stop consuming that good. If marginal benefit is equal to the marginal cost, then stop at that point because at that point you  are satisfied most. Economics as a Social Science Positive Statement Vs Normative Statement Positive Statement: What is? Says what is currently believed about the way the world operates. It might be right or wrong, so we have to check the facts to see what it is. Normative Statement: is about what ought to be. Depends on values and unlike positive  statements can’t be tested. Economic Model: is a description of some aspect of the economic world that includes only the  features needed at hand. Chapter 2 Production Possibilities Frontier (PPF): is the boundary between those combinations of goods  and services that can be produced and those that cannot. Cost Varies across individuals There are two advantages when we are talking about costs varying across individuals. 1. Absolute advantage: Produce more in the same amount of time or producing same  amount in less time 2. Comparative advantage: produce at lowest opportunity cost. Example: Bob and Dillon both own a successful burger and milkshake joint. In one­hour Bob can make 15  hamburgers and 30 milkshakes. Dillon in one hour can make 10 hamburgers and 10 milkshakes                              Hamburgers                   Milkshakes Bob                             15                                     30 Dillon                          10                                     10 In this table we see that Bob has an absolute advantage in both milkshakes and burgers since he  produces more than Dillon. However, when we calculate the opportunity cost of producing one  more burger or milkshake it is completely different. For Bob to create 1 milkshake he has to sacrifice 2 burgers which we get from 30/15=2. For  Dillon to create 1 milkshake he only has to give up one burger by 10/10=1. Since Dillon gives up less burgers to create milkshakes then Bob, Dillon has a comparative advantage in milkshakes. However, Dillon won’t have a comparative advantage in both!!!! If we look, for Dillon to create 1 burger, he has to give up 1 milkshake, but compared to Bob  only have to give up ½ of a milkshake by doing 15/30. Since Bob gives up less of a milkshake  then Dillon when creating a burger, Bob has a comparative advantage in burgers.  Parkin, M., & Blanchard, K. (2012). Microeconomics for Economics 251. Boston, MA: Pearson. 


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