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EC101 (Textbook & Lecture Notes) - Week 1

by: Candace

EC101 (Textbook & Lecture Notes) - Week 1 EC101 (Economics, Manove, INTRODUCTION TO MICROECONOMICS)

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About this Document

These notes cover the suggested reading material for the week as well as what was covered during lecture. Covers basics of Economics.
Introductory Microeconomic Analysis
Class Notes
Economics, Microeconomics




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This 6 page Class Notes was uploaded by Candace on Friday September 9, 2016. The Class Notes belongs to EC101 (Economics, Manove, INTRODUCTION TO MICROECONOMICS) at Boston University taught by Manove in Summer 2016. Since its upload, it has received 501 views. For similar materials see Introductory Microeconomic Analysis in College of Arts and Sciences at Boston University.

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Date Created: 09/09/16
MICROECONOMICS (EC101) WEEK 1 NOTES TEXTBOOK NOTES 1. The Scope and Method of Economics Economics: the study of how individuals/societies use resources from nature/previously provided A. Why Study Economics? 1. To Learn a Way of Thinking a. Opportunity Cost – “The alternate choice/decision that is given up when we make a specific choice” b. Marginalism – “when the additional benefits/costs from a specific decision/choice is analyzed” c. Efficient Markets  No Free Lunch! – “when any profit opportunities are canceled out almost immediately” *Profit opportunities – good deals/risk-free 2. To Understand Society a. Past/present economic decisions  huge impact on character of life within a society (ex: material well-being, number of jobs, etc.) *Industrial Revolution – increased agriculture productivity, new manufacturing tech, movement of more efficient transportation b. Social changes driven by economics 3. To Be an Informed Citizen a. Basic understanding of economics  drive the regulations/decisions of society. B. The Scope of Economics 1. Microeconomics and Macroeconomics a. Microeconomics – studies the functioning of individual industries & behavior of firms & households (individual economic decision-making units) *What to produce/how much to buy *Distribution (input/output) of goods/services b. Macroeconomics – studies economy as a whole or national scale *Factors to determine national output/product *National income C. The Method of Economics *Positive economics – understanding the behavior & operation of economic systems without making calls on whether outcome is good/bad * Normative economics – understanding outcomes of economic behavior and asking whether they will be good/bad & how to make outcome better if possible 1. Theories and Models a. Model – formal (usually mathematical) statement of a theory (presumed relationship between 2+ variables b. Variable – measure that changes from time to time/observation to obsrv. c. Ockham’s razor – all models = abstractions  strip away details to view only important aspects d. Ceteris paribus – “all else equal” = assuming nothing else changes e. Post hoc, ergo propter hoc – “after this, therefore because of this” = error of inferring causality from two events occurring, one after the other f. Empirical economics – collection & use of data to test economic theories 2. Economic Policy a. Efficiency (allocative efficiency) – producing what is wanted at least possible cost b. Equity – fairness; equal distribution of income/wealth OR giving people what they’ve earned c. Economic growth – increase in the total output of an economy; output grows faster than population & standards of living increase d. Stability – national output grows steadily; low inflation & full employment of resources 2. The Economic Problem: Scarcity and Choice Capital: produced then used in production of other goods/services; does not need to be tangible Factors (factors of production): basic resources readily available Production: transformation of scarce resources into useful goods/services Inputs: resources/factors of production Outputs: services/goods produced A. Scarcity, Choice, and Opportunity Cost 1. Scarcity and Choice in a One-Person Economy a. Simplest economy  must decide how to allocate resources, what to produce & when/how, given the possibilities/resources available 2. Scarcity and Choice in an Economy of Two or More a. Decision-making arrangements *One may take charge *Joint plan – agree to cooperate; equal say *Split planning/production during *Live alone  specialization; trading b. Theory of comparative advantage – specialization & free trade benefit ALL trading parties c. Absolute advantage – when one can produce goods/services using fewer resources d. Comparative advantage – when one can produce a good/service at a lower opportunity cost e. Total production increases w/ specialization f. Consumer goods – for present consumption g. Investment – using resources to produce new capital LECTURE NOTES 1. Thinking Like an Economist A. Goods (not $) – material wealth of society Ex: 2015 Stock Market mini-crash ($3000 billion) *Goods  still available *Investors  beliefs  value decreased (Bad for sellers/good for buyers) B. Almost everything has a cost Ex: B/c resources are scares, must make sacrifices to achieve other things *Opportunity cost = required sacrifice C. People respond to incentives (sometimes unexpected ways) Ex: Protecting the elderly *Prohibiting eviction of elderly for not paying rent  More difficult to collect rent  Landlord’s incentive to NOT rent to elderly Ex: Using more of x  creates more of x D. Deciding “how many”  Margin 1. Marginal unit – next unit to be added to units already owned 2. Marginal benefit – benefit provided by marginal unit 3. Marginal cost – opportunity cost of marginal unit *Marginal benefit & cost compared when deciding to buy/sell/use units *Benefit must be at least as great as cost (does NOT have to be = ) E. Prices reflecting ALL opportunity costs provide best incentives Ex: Highway tolls *Best way to reduce congestion *Cover cost of congestion F. Statistical findings are often misleading Ex: Harvard Psychiatrist: “Sex makes students unhappy” *CANNOT conclude ^ *SHOULD conclude: “Sex is associated w/ unhappiness among Harvard students seeing psychiatrists” 2. What is Economics? A. Definition Scientific study of human behavior associated w/ production & distribution of necessities/convenience in life 1. Necessities/conveniences – goods & services needed/wanted 2. Production – transformation of some goods/services (inputs)  other goods (outputs) 3. Distribution *Primitive economy – produce/consume for themselves *Complex economy – specialist producers *Large quantity input  large quantity outputs  distributed to consumers 4. Human behavior *How people organize themselves for production & distribution of goods/services *What people DO creates necessities & conveniences 5. Scientific Study *Observational science *Models  basic economic tool -Mathematical models -Similar in details intended for analysis, but simpler in unimportant details 3. Important Economic Concepts A. Wealth “The capacity to create valued goods/services”; must also understand the wealth discrepancies between countries 1. Forms *Physical capital (buildings, roads, cars, stores, etc.) *Human capital (education, training  more productive people) *Social capital (productive relationships/connections) -Relies on trust -Good gov’t B. Economic Agents Agents – person/group that plays active role in economy Ex: A person may play different roles in each group *Households – individuals or small groups w/ joint economic decisions *Firms – individuals producing alone/groups producing together *Gov’t – jointly regulates households/firms -Can be specialized firm  regulates -Supplies public goods C. Absolute Advantage Producing a good using a smaller amount of resources than competitor D. Comparative Advantage Competitor w/ smaller opportunity cost of producing item A instead of item B E. Specialization Producing goods where you have the comparative advantage  increases total production


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