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Econ 2005 Notes Week 1

by: Dhairya Surana

Econ 2005 Notes Week 1 ECON 2005

Dhairya Surana
Virginia Tech
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About this Document

Covers topics on the following: Opportunity cost Inputs of Production Circular Flow Model Absolute advantage Sunk costs
Principles of Economics
Steve Trost
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This 4 page Class Notes was uploaded by Dhairya Surana on Saturday August 27, 2016. The Class Notes belongs to ECON 2005 at Virginia Polytechnic Institute and State University taught by Steve Trost in Fall 2016. Since its upload, it has received 143 views.


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Date Created: 08/27/16
Econ 2005 Notes-Week 1  Economics: study of the choices people (agents) make and how those choices are made  Agents: anyone who makes decisions  Scarcity: lack of resources (something is scarce if more of it is wanted than what is available at 0 price)  Opportunity Cost: what is given up to make a decision (NOT NECESSARILY MONEY) o What could have been done (the best alternative) instead of the decision made o Ex: Spend all night partying…. Opportunity Cost: studying for exam OR Spend all night studying…. Opportunity Cost: go to the party  Ceteris Paribus: “All else Equal” or “Holding everything else constant”  Positive Economics: based on facts/data (What is)  Normative Economics: based on opinion (What should be)  Prescriptive Economics: What should be done  Industrial Organization: how firms/industries affect the economy  Labor Economics: how jobs, wages, and firms relate to each other  Econometrics: statistics used to test economic hypothesis/theories  Rational Self-Interest: making the best decision for oneself (requires gathering info) o rational decision makers will gather more info for as long as its cost does not exceed its benefit of helping to make better decisions o Examples  Tourists will pay travel agents to help them determine the best way to plan their trips  Economists will spend time looking at all sorts of data to determine what type of policy the government should implement  Things that economists should consider before making decisions: o Looking at unintended consequences o Knowing the difference between association and causation  Association: one variable seems to directly affect the other, but that is not true  Ex: price of produce increases as gas prices increase  Causation: one variable causes the other  Ex: the more food you eat, the heavier you get o Avoiding fallacy of composition (thinking that something that is good for one person will be good for everyone) o Being aware of self selection (the sample is not representative of an entire population)  Inputs of Production: o Labor (physical, mental, time)  Payment/cost: wage o Capital (physical, human)  Payment/cost: interest  NOTE: capital is NOT always money (can be factories, tools, education, training, etc.) o Natural resources (land, wood, etc.)  Payment/cost: rent  Two types: renewable and exhaustible o Entrepreneurial ability (talent, idea, risk of operation)  Payment/cost: profit  Remember: EVERYTHING has a cost (does not have to be $)  Absolute advantage: Producing something faster, in larger quantities, or with fewer resources o Ex: There are two tribes: Tribe A and Tribe B. The quantities below represent how much each tribe can produce if they use all of their resources for only one type of product (either all spears or all baskets, not both) Tribe A production in 2 months: 100 spears 50 baskets Tribe B production in 2 months: 80 spears 20 baskets Tribe A has the absolute advantage in both spears and baskets since it can produce more spears or baskets than tribe B can during the same span of time  Comparative advantage: The person, or group, that produces something at a lower opportunity cost should specialize in producing that good or service o Trade is based on comparative advantage  Sunk costs: Costs that cannot be avoided or recovered o Ex: spending money on a movie that was bad (sunk cost: money and time spent) o Sunk costs should be ignored when making economic decisions  Model: simple representation of a concept/idea that is used to make predictions and test relationships  Marginalism: additional/incremental costs or benefits that arise from a choice or decision Circular Flow Model Product Market Products Goods and Services Expenditures/Spendin Revenue g Househol Firms ds Income Payment for Inputs of Production** Inputs of Production* Resources Resources Market * labor, capital, natural resources, entrepreneurial ability ** wages, rent, interest, profit


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