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CHAPTER 1: Economics & Economic Reasoning Notes

by: Kandis Philord

CHAPTER 1: Economics & Economic Reasoning Notes ECO 2013

Marketplace > University of South Florida > Economics > ECO 2013 > CHAPTER 1 Economics Economic Reasoning Notes
Kandis Philord
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About this Document

Notes from Chapter 1
Dr. Tarron Khemraj
Class Notes
Macroeconomics, scarcity, Microeconomics, forces, market, reasoning




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This 4 page Class Notes was uploaded by Kandis Philord on Saturday August 27, 2016. The Class Notes belongs to ECO 2013 at University of South Florida taught by Dr. Tarron Khemraj in Fall 2016. Since its upload, it has received 14 views. For similar materials see Macroeconomics in Economics at University of South Florida.


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Date Created: 08/27/16
  ● What Economics Is  ■ Economics​ is the study of how human beings ​coordinate​ ​their wants and  desires, given the decision­making mechanisms, social customs, and political  realities of the society.  ■ Coordination ​refers to the 3 central problems facing any economy are  solved  ■ 1. What, and how much to produce.  ■ 2. How to produce it.  ■ 3. For whom to produce it.  ○ Scarcity  ■ 2 elements  ■ 1. wants  ■ 2. means of fulfilling wants  ■ (these elements can be interrelated since wants are changeable and  partially determined by society)  ■ example:​ if you work on Wall Street, you will probably want  upscale and trendy clothes. In Vermont, I am quite happy  wearing Levi's and flannel; in Florida I am quite happy  wearing shorts.  ■ The quantity of goods, services, and usable resources depends on  technology and human action.  ■ How does an economy deal with scarcity?  ■ In all known economies, ​coordination​ has involved some type of  Coercion  ■ limiting people's wants and increasing the amount of work  individuals are willing to do to fulfill those wants  ■ ALTERNATIVE DEFINITION OF ECONOMICS: ​the study of how to get  people to do things they're not wild about doing (studying) and not to do the  things they are wild about doing (eating all the lobster they like), so that the  things some people want to do are consistent with the things other people  want to do.  ○ Microeconomics and Macroeconomics  ■ Microeconomics (individuals):​ the study of how individual choice is  influenced by economic forces.  ■ Microeconomic theory considers economic reasoning from the  viewpoint of individuals and firms and builds up to an analysis of the  whole economy.  ■ examples of what microeconomics studies: ​pricing policies of  firms, household's decisions on what to buy, and how markets  allocate resources among alternative ends.  ■ Macroeconomics (whole economy):​ the study of the economy as a whole.  ■ It considers the problems of inflation, unemployment, business  cycles, and growth.  ■ examples of what macroeconomics studies:​ how household  consumption is related to income and how government policies can  affect growth (aggregate relationships).  ■ A Guide to Economic Reasoning  ■ Economic reasoning is making decisions on the basis of costs and  benefits.  ■ TANSTAAFL ­ T​HERE ​A​IN'T ​N​O ​S​UCH ​T​HING ​A​S ​A F​REE ​L​UNCH  ■ Marginal Costs and Marginal Benefits ­­> ​[KEY CONCEPTS]  ■ Relevant costs and relevant benefits to economic reasoning =  ​ ​ the expected ​incremental (marginal, additional) ​ costs incurred  ​ and the expected i​ ncremental benefits that result from a  decision  ■ Marginal cost ­​ the additional (incremental) cost to you over  and above the costs you have already incurred (not counting  sunk costs).  ■ Sunk cost ­​ costs that have already been incurred and  cannot be recovered  ■ example: ​ attending class. You have already paid  your tuition; it is a sunk cost. So the marginal  (additional/incremental) cost of going to class does  not include tuition.  ■ Marginal benefit ­ ​ the additional benefit above what you've  already derived.  ■ example:​ the marginal benefit of reading this chapter  is the additional knowledge you get from reading it. If  you already knew everything in this chapter before  you picked up the book, the marginal benefit of  reading it is now zero.  ■ The Economic Decision Rule  ■ If the marginal benefits of doing something exceed the  marginal costs, do it.   ■ If the marginal costs of doing something exceed the marginal  benefits, don't do it.  ■ Economics and Passion  ■ Economic reasoning is based on the premise that everything  has a cost.  ■ Opportunity Cost  ■ (the basis of cost/benefit economic reasoning) the benefit that  you might have gained from choosing the next­best  alternative.  ■ Implicit costs ­ ​costs associated with a decision that often  aren't included in normal accounting costs.  ■ The costs relevant to decisions are often different from the  measured costs.  ■ Economic Forces, Social Forces, and Political Forces  ■ Economic and Market Forces  ■ Economic forces ­ the necessary reactions to scarcity  ■ Market force ­ an economic force that is given relatively free  rein by society to work through the market.  ■ Market forces ration by changing prices.   ■ The invisible hand ­ the price mechanism, the rise and fall of  prices that guides our actions in a market  ■ Economic reality is controlled by three forces:  ■ 1. Economic forces (the invisible hand)  ■ 2. Social forces  ■ 3. Political forces  ■ Social and Political forces:  ■ Social forces ­ forces that guide individual actions even  though those actions may not be in an individual's selfish  interest  ■ Political forces ­ legal directives that direct individual's actions  ■ Social, cultural, and political forces can play a significant role  in the economy.  ■ What happens in society can be seen as a reaction to, and  interaction of, economic forces with other forces.  ■ Using Economic Insights  ■ Economic model ­ a framework that places the generalized insights of  the theory in a more specific contextual setting  ■ Economic principle ­ a commonly held economic insight stated as a  law or principle  ■ Experimental economics ­ a branch of economics that studies the  economy through controlled experiments  ■ Theories, models, and principles must be combined with a knowledge  of real­world economic institutions to arrive at specific policy  recommendations precepts (policy rules that conclude that a  particular course of action is preferable) .  ■ Economic models are less general than theories. They are  still too general to apply in specific cases  ■ Models lead to theorems (propositions that are logically true  based on the assumptions in a model)  ■ The Invisible Hand Theorem  ■ A market economy through the price mechanism, will tend to  allocate resources efficiently.  ■ Efficiency ­ achieving a goal as cheaply as possible.  Economists call this theorem the ​invisible hand theorem  ■ If you don't know the assumptions, you don't know the theory.  ■ Economic Theory and Stories  ■ Theory is a shorthand way of telling a story.  ■ These stories are important; they make the theory come alive  and convey the insights hat give economic theory its party  ■ Economic Institutions  ■ To apply economic theory to reality, you've got to have a  sense of economic institutions.  ■ Economic institutions = laws, common practices, and  organizations in a society that affect the economy  ■ examples of economic institutions: ​ corporations,  governments, and cultural norms  ■ Many economic institutions have social, political, and religious  dimensions.  ■ example: your job influences your social standing  ○ Economic Policy Options  ■ economic policies ­ actions (or inaction) taken by government to influence  economic actions  ■ to carry out economic policy effectively, one must understand how institutions  might change as a result of the economic policy.  ■ Objective Policy Analysis  ■ good economic policy analysis is objective;  ■ Objective analysis keeps, or at least tries to keep, an individuals  subjective views ­­value judgements­­ separate.  ■ Three categories of economics:  ■ 1. positive economics ­ the study of what it is, and how the  economy works  ■ 2. normative economics ­ the study of what the goals of the  economy should be  ■ 3. the art of economics ­ (also called "political economy") the  application of the knowledge learned in positive economics to  achieve the goals one has determined in normative  economics  ■    


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