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Chapter 1

by: Brooke Dedeaux

Chapter 1 EC-2113-01

Brooke Dedeaux
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About this Document

Limits, Alternatives, and Choices
Principals of Macroeconomics
Heriberto Gonzalez Lozano
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This 4 page Class Notes was uploaded by Brooke Dedeaux on Monday August 29, 2016. The Class Notes belongs to EC-2113-01 at Mississippi State University taught by Heriberto Gonzalez Lozano in Fall 2016. Since its upload, it has received 6 views.


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Date Created: 08/29/16
Chapter 1- Limits, Alternatives, and Choices We need economics because we don't have enough resources What are the benefits and what are the cost? • not attending class today could affect the test grade next month • Could miss bonus points How married couples make the decisions of having babies? An act of love or economic analysis? • A couple in their 30's are more likely to have a baby versus a couple that is in their 20's. They are more financially stable. • As a governor of Mississip pi, Increase or decrease taxes? Increase spending on education or fund programs to decrease poverty? o Governors are constantly being judged because of the decisions they make on day to day basis. What are the benefits? What are the cost? These are simple q uestions that we ask ourselves everyday but no one ever ask us why we made the decision we made. • As an owner of a big manufacturing company in expansion, buy high -tech technology to make products or hire more workers? o Pay dividends to shareholders or reinvest money o Every company starts out small and gets bigger and bigger every day Economics • a social science concerned with making optimal choices under condition of scarcity Unlimited wants > limited resources = scarcity • Everyone faces scarcity (individuals, organizations, countries, societies, etc.) EVEN TIGER WOODS! • Economic wants exceed society's productive capacity Optimal choices are described as the best or most favorable decision, but that doesn't mean it will always work out like intended Scarcity and Choices • Resources are scarce o Choices must be made o December vacation (one week) Time, money, health condition • Opportunity cost (most important) o The decision to engage in one activity means forgoing some other activity o There is no free lunch. Oxygen isn't even free, we share it with others. o Pay tuition or buy an Xbox? Pay tuition because in order to have a good job you need an education making paying your tuition more impo rtant. o Example: You could go have lunch with a friend, sleep in, go to the gym, or any other activity instead of going to class but at the end of the day you always choose to go to class. You have many choices you can choose from but you tend to always choose the most import. o Someone is always having to give up something The Economic Perspective • Scarcity and Choice • Opportunity cost • Purposeful behavior to increase utility • Marginal analysis o If you don't eat you will get sick or faint • Example: Studying for one hour could change your grade from an 80 to an 85. The more you study the more your grade will increase. Someone could want a 100% in the class but only study for 30 mins and not learn all of the information needed to receive the grade wanted. Choosing to attend a party or hangout with friends will take away from your study time and will reflect your grade. If you study before you have fun you would have a better chance of getting the grade you want. This is all about the benefit and cost, making good decisions result in a good outcome. • Example: Choosing to sit in class, study, and pay tuition will result in getting a good job with excellent benefits versus sleeping in, partying, and buying an Xbox that will result in being in a employee riot outside on McDonald's. Purposeful Behavior Rational self-interest • People strive to achieve personal satisfaction (utility) • Self interest =\ selfishness o Self interest someone doing volunteer work o Selfishness is not sharing with others and only thinking about yourself • Individuals and utility • Firms and profits • Desired outcomes Its easier for a firm to make a profit than an Individual because individuals have to work a lot harder to make any sort of profit Choosing to buy a product from a Walmart versus a family owned company you would typically choose cheaper one because of self interest Marginal analysis • Marginal means extra • Marginal benefit vs marginal cost • Marginal benefit: the benefit that a person receives from con suming one more unit of good or service. Marginal benefit decreases as more of a good is consumed or used • Marginal cost: the opportunity cost of producing one or more unit of a good or service. The marginal cost of producing a good increases as more of the good is produced Example - Choosing a Pathfinder • How do you decide which one to buy? o Price o Features o Location • Choosing which model type you use marginal analysis Theories, principle, and models • Scientific method Economic principle • Generalization • Other things equal assumptions o Ceteris paribus • Graphical expression Microeconomics: the study of the individual consumer firm or market Macroeconomics: the study of the entire economy or a major aggregate of the Econ Positive and Normative Econo mic • Positive: economic statements that are factual o Can be confirmed or refuted o Example: Government should print more money. An increase in the price of burritos will cause an increase in consumer demand for music downloads • Normative: economic statement that involve value judgments o Statements cannot be confirmed or refuted o Example: Prices rise when the government increases the quantity of money. A tax cut is needed to stimulate the economy. The wording of a statement will determine whether or not it is positive or normative Economizing problem • Limited income and unlimited wants • Budget line • Attainable and unattainable combinations • Trade-offs and opportunity cost Society's Economizing Problem (Important) • 4 categories or economic resources - factors of production that we will use all of the time o Land - oil,water o Labor - workers o Capital - economics (machinery, goods that produce more goods), real life (money) • Investment - trying to produce more goods o Entrepreneurial ability - ideas we have • Ideas are scarce Production possibilities model • Economic model that shows different combinations of two goods that an economy can produce • Full employment - everyone that can work is working • Fixed resources • Fixed technology • 2-good economy • Consumer goods and capital goods Increasing opportunity cost • Law of increasing opportunity cost o As more of a particular good is produced, it's marginal opportunity cost increases • Production possibilities curve o Concave shape • Economic rationale International Trade • Specialization • Increased production possibilities o Expand PPF Pitfalls to Sound Economic Reasoning • Biases o Cause to feel or show inclination or prejudice for or against someone or something • Loaded terminology • Fallacy of composition o What is good for one may not be good for the whole economy. If one person is doing good does not always mean everyone is doing good. • Correlation not causation o The number of homeless people increases means criminology increases. This does not mean that the homeless are committing the crimes.


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