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Econ 200 Week 1 Notes

by: Drew Herring

Econ 200 Week 1 Notes ECON200

Drew Herring
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These notes extensively cover all of chapter 1 from the microeconomics textbook. You will easily be able to complete all of the homework questions off of reading these notes. I cover all of the imp...
Principles of Micro-Economics
Hossein Abbasi Alikamar
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This 5 page Class Notes was uploaded by Drew Herring on Thursday September 1, 2016. The Class Notes belongs to ECON200 at University of Maryland taught by Hossein Abbasi Alikamar in Fall 2016. Since its upload, it has received 395 views. For similar materials see Principles of Micro-Economics in Microeconomics at University of Maryland.


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Date Created: 09/01/16
Week One Notes Economics & Life I. The Basic Insights of Economics A. Economics is the study of how people, both individually and  collectively, manage resources. 1. Individual: Employees, students, etc. 2. Collective: Firms, families, government agencies,  etc.             What are resources? Resources are both tangible and intangible. 3. Tangible Resources: Cash, factories, employees 4. Intangible Resources: Time, education, experience B. Economics is broken down into 2 broad fields: Microeconomics  and Macroeconomics. 1. Microeconomics ­ The study of how the economy  works on a small scale, such as within business and families. 2. Macroeconomics ­ The study of the economy on a  much larger scale, ranging from cities, to regions, and countries. Both fields are highly related, and both really boil down to how these entities  manage their resources. C. Economics is dependent on the concept of rational behavior. This means that economists assume that the choices people make are made with the  intention of efficiently achieving some goal. In economics, there are four  fundamental questions of rational behavior. They are: 1. What are the wants and constraints (limitations) of  the people involved? 2. What are the trade­offs? (Cost/benefit analysis) 3. How will others respond? 4. Why isn’t everyone already doing it? ● Question 1 is governed by the principle of Scarcity ­ The  condition of wanting more than what your limited resources can get you. Scarcity  always involves a want plus a constraint. Say that I WANT a vacation, but I don’t have the time or the money. Time and money are my CONSTRAINTS. This  conundrum is called scarcity. ● Question 2 is governed by the principles of Opportunity Cost and Marginal Decision Making. ○ Opportunity Cost ­ The value of what you have to  give up in order to get/do something else. The value of the next best  alternative. ■ Back to my vacation. Say I could  pick a cruise, or a trip to Disney World. I value the cruise more, so  I choose that option. My opportunity cost is the trip to Disney  World. Say I’m given the chance to go to the Bahamas too. If I  pick the Bahamas, then my opportunity cost is the cruise, because  it is the next best alternative to me; that is the value that I place on  the cruise is higher than the value I place on Disney World.  Opportunity cost is always about the value that you personally  place on something, not its actual monetary value. ○ Marginal Decision Making ­ The comparison of  additional benefits of a choice against the additional costs it would bring,  without considering the related benefits/costs of past choices. ■ Alright, my vacation budget fell  through. I only have $30, so now I’m looking at a day trip. A local  amusement park has $20 admission, with an additional $2 for  every ride. If I’m outside of the park, the marginal cost of the first  ride is $22. If I’m inside the park, the marginal cost of the ride is  $2, because I’ve already paid the admission fee. The marginal cost  of the second is $2. The marginal cost of the 3rd ride is $2 as well,  and so is the 4th and 5th and on and on it goes. The key to understanding marginal decision making lies within the concept of  Sunk Costs: Costs that have already been incurred (charged) and can’t be  refunded or re­collected. Marginal costs will NEVER include sunk costs. ● Question 3 is governed by the principle of  Incentives ­ Anything that causes people to behave in a certain way by  changing the trade­offs they face. There are two kinds of incentives: ○ Positive Incentives ­ Incentives that  prompt people to do something/make a choice to act a certain way. ○ Negative Incentives (also called  disincentives) ­ Incentives that prompt people to not do something. A common example would be prices on a menu. Subway is known for  their $5 foot­long sub. The low price and trusted brand name is altogether a positive  incentive for hungry people looking for lunch. Suppose you arrive at Subway, and  discover that they have raised their prices to $10 for a foot­long sub. This higher price  serves as a disincentive ­­ in other words, it might make you not want to spend your  money on that sandwich. ● Question 4 is governed by the principle of  Efficiency ­ The use of resources in the most productive way possible to  produce the goods and services that have the greatest total economic value on society.  The taxi/transportation company Uber is an excellent example of an efficient  company. Uber capitalizes on providing transportation services to people who are without access to a car. They allow customers to schedule when they will need an Uber driver to  come pick them up, thereby eliminating any unnecessary waiting time that comes with  public transportation. D.    However, when it comes to pitching new ideas, there are some economic  variables to take into consideration. A couple of question marks always surround new  products/ideas when they first enter the business world. When trying to answer the  question: “Why isn’t everyone already doing it?” There are four scenarios in particular  that are considered to be the most common. ● Innovation ­ Innovation is the answer you’re hoping for, but it’s also the hardest answer to get. If you have a genuinely original idea, there’s no telling how it will play out because the economy hasn’t  seen it yet. ● Market Failure ­ This is an option that plays out  much more frequently. Suppose you come up with an idea for a brand new design of tennis shoe; one that should revolutionize the market of athletic  shoes. Well, the shoe industry is quite handily controlled by a few big­ name corporations such as Nike, Adidas, and Reebok, so what’s to stop  them from stealing/modifying your idea and taking the profits for  themselves? They already have the brand recognition, so although the idea is yours, their product would still sell better. ● Intervention ­ If an influential force (i.e.  governmental branches, large corporations) regulates, interferes with, or  shuts down business, it is classified as an intervention. Picture a shop that  sold alcohol to underage college students. Either the college, the police, or some federal agency would shut it down, despite the fact that it was  making good business. That’s intervention. ● Goals other than profit ­ Maybe you’re one of the  few authentic altruists out there. If you work for a non­profit and your goal is community service for the sake of bettering the world around you,  kudos, but you won’t be making money. II.  An Economist’s Problem­Solving Toolbox The four questions I brought up help us to make economic analyses. As described in the  textbook, “Economic analysis requires us to combine theory with observations and to subject  both to scrutiny before drawing conclusions. A) Correlation and Causation 1. Correlation ­ A consistently observed relationship between two  events or variables. ○ Statistics show that high consumption of ice cream  is correlated with high rates of murder. How is this true? A third variable,  heat, has been omitted. More violent crime occurs on hot days. Likewise,  ice cream consumption also increases on sunny days. This shows that  correlation doesn’t always imply causation. 2. Causation ­ A relationship between two events in which one  brings about the other. ○ Causation is much easier to understand. High rates  of crime >>> increased number of police officers. Be careful about reverse causation, though. A leads to B, but B doesn’t always lead to A. A large  number of police officers doesn’t lead to increased crime. B) The Circular Flow Model Study the following diagram      The green arrows of this loop represents Outputs, while the blue arrows represent Inputs. There are three criteria that a good model must meet: 1. It must show cause and effect 2. It must make clear assumptions 3. It must try and describe the real world accurately C) Positive vs Normative Analysis ● In economics, there are two kinds of statements that can be made. There are  ○ Positive statements ­ Factual claims about how the world actually works. Think statements that are  definitely positively true, or are at least presented that way. ○ Normative Statements ­ A claim  about how the world should be. Think statements that say, “If the  world was normal, or fair, things should be this way…” That’s about everything from chapter 1. If you come away from this with anything, it  should be the principles of: a) Scarcity b) Opportunity Cost/Marginal Cost c) Incentives d) Efficiency


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