ECON 2010 Week 1 notes
ECON 2010 Week 1 notes ECON 2010
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This 6 page Class Notes was uploaded by jared.stein Notetaker on Sunday September 11, 2016. The Class Notes belongs to ECON 2010 at University of Colorado at Boulder taught by Dr. Charles A M de Bartolome in Fall 2016. Since its upload, it has received 12 views. For similar materials see Principles of Microeconomics in Microeconomics at University of Colorado at Boulder.
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Date Created: 09/11/16
08/23/16 Lecture 2: I. Introduction: II. Eleven Big Ideas 0.) Things are Scarce: Resources are limited but people’s wants are unlimited. • Everybody cannot get everything they want. 1.) Because resources are limited, people face trade-offs. • To get something, one must give up something. This is the trade-off. • Ex: To spend more time studying, have to give up time partying. 2.) The cost of something is the cost of what you give up-Opportunity Cost. • Opportunity Cost: the loss of potential gain from other alternatives when one alternative is chosen. • Ex: Cost to go to university is: Tuition ($50,000) + Wages Lost ($30,000) = Opp. Cost ($80,000) 3.) When making decisions, useful to think “at the margin.” • We don’t think in terms of “all or nothing” but instead “a little more or a little less.” • Ex: We don’t have to choose between “never eat out” and “always eat out”, instead we think, “do I want to eat out one more time?” 4.) People respond to price changes. • People can be manipulated into doing things by raising or lowering the prices of goods, services, and commodities. • Ex: To get less people to use US 36 (Boulder Freeway) Option A: Broadcast appeals (Please don’t drive)=ineffective Option B: Charge or increase toll=effective 5.) Trade can make everybody better off • Ex: Japan makes good cars that the US wants, US makes good software that Japan wants. >Choose to trade<. Japan gives up cars in exchange for US software, and US gives up software in exchange for Japanese cars. + Trade is done voluntarily and thus both can feel better. 6.) Markets with many buyers and sellers are a “good” way to organize economic activity. • Denver Apt. Market vs. NY Apt. Market 7.) Government can sometimes improve on the market outcome. • In the case of: • Equity Concerns: Market gives too much to one group and not enough to another. • Market Power: Only a few sellers creates a monopoly. Ex: Apple is only seller of iPhones • Externality: Party is not responsible for the byproducts of their actions Ex: Oil refineries don’t pay for health hazards associated with breathing in the toxic air produced by the refinery. 8.) Conceptual difference between the benefit of a good and its price. • Ex: 1 day at the ski park: Benefit - “I had a great day, felt like $100.” Price - Lift ticket cost $50. Was it worth it? Yes. 9.)Production and consumption decisions coordinated through prices. • Ex: Electric cars use Lithium batteries and are becoming more popular. Thus, we need more Lithium. As Lithium is used up (demand increases) so does price, miners have more incentive to mine Lithium to keep up with demand and make $$. 10.) Economics is about predictions-guessing the future. • What would happen if…. Ex. “...Google broke into 2 firms?” III. Economics is a Social Science Social = about people Science = about quantitative problems IV. How to make quantitative predictions A. Use Theories or Models 1. A simplification to the most important points 2. A representation which tells us what we really need to know 3. Not a real thing, but a good representation of the real thing 4. Contains 90% truth Ex: Flowchart, map, model B. Testing 1. How good of a representation of the real thing is it? 2. Do we believe it makes good predictions? a. Has it made good predictions in the past? Econometrics b. Laboratory experiment 08/25/26 Lecture 3: I. Introduction II. Normative and Positive Economics A. What are they? 1. Positive a. About linkages: need to know the process. b. About What is. c. About How the World Works. d. Linkages described by social scientists 2. Normative a. About ranking outcomes: need to know value judgments (How much is it worth). b. About What ought to be. c. About How we want the world to look. d. Policies advocated by policy analysts. • Normative Policy: “The right thing to do now is…” • Normative comes from root “norm” e. A Standard (ex. Social Norms) • “Normal” has same root: • ”Most babies start taking their first steps between 11 and 15 months, but...anywhere from 9 to 18 months is considered normal” • 18 months is the standard age and the child should go see a doctor if taking longer than 18 months. • Not “average” walking age III. Circular Flow Model of Economy A. Normative Model to understand linkages between households and firms 1. Normative Model: a. Households: own resources (capital and labor) which are provided to firms Firms: use resources to make goods which are given to households. 2. Normative Question: “Should” a. How much labor should labors be providing to households? b. How many (insert good/service) should firms produce and households consume. B. Positive Model with linkage being by market 1. Positive Model: (Key difference: Exchange $$ to generate profit) a. Households: own resources which they sell to firms at voluntarily agreed prices (get income $$) b. Firms: Get $ from sale of goods to households at voluntarily agreed prices, and use $ to buy resources from households at voluntarily agreed prices. c. Money, Goods/Services, and Resources are all being moved around. 2. Positive Question: under the market system: a. How much income do houses get by selling labor to firms? b. How many (goods/services) produced by firms are consumed by households. IV. Production Possibility Model A. Model to understand the connections between ideas of: • Scarcity • Trade-offs • Opportunity Cost Line is called “Production Possibility Frontier. (Solid Line = Original Situation; Dashed Line = New/Changed Situation 1. Above Line: impossible 2. On Line: Possible a. Given any c, i is as large as possible, gets most output with no wastage b. Production efficient 3. Below Line: Possible a. Given any c, i can be larger but not getting most output, results in wastage b. Production inefficient 4. Production Frontier a. Scarcity: Because of limited amounts of resources, there is a frontier. If more resources, more can be produced and the frontier shifts up b. Trade-off: Frontier is downward sloping, this means resources devoted to one production take away resources from other production. One rises, other falls c. Opportunity Cost: if 1 extra unit of Product 1 produced, then 1 less unit of Product 2 produced. This creates slope of frontier. B. Case 1: 1. Simplest Case: All machines are the same, a machine can produce either 1 consumption good or ½ investment good. (Machines=Resource) a. If all machines produce investment: No c; 500 i b. If all machines produce consumption: 1000 c; no i c. If ½ machines produce consumption, and ½ produce investment: 500 c; 250 i 2. Slope of Frontier: -½ 3. Algebra along frontier: a. c prod. machines + i prod. machines = Total machines b. 1 unit of i uses 2 machines: c + 2i = 1000 C. Case 2: 1. Machines are not good at making c or i. (Good at producing c, bad at producing i; Ot good at producing i, bad at producing c.) Calculate opportunity cost of making c with each machine. Place machines in a line with lowest opportunity cost on left, and highest on right: +(Good c, bad i)+ +(Good i, bad c)+ <--------------------------------------------------------------------------------------------------------------> a. All machines producing i. • Asked to produce 1 unit consumption: • Switch across machine which causes least loss of investment (per unit c) • Switch across machine with lowest opportunity cost - 1st machine on L - Asked to produce 2nd unit of consumption: • Switch across machine which causes (next) least loss of investment (per unit c) • Switch across machine with lowest opportunity cost - 2nd machine on L. b. Curve gets steeper, or production possibility frontier bowed out. Machines with low opportunity cost shifted first, then machine with higher opportunity cost (curve steeper). V. Recap: Above Frontier: impossible On Frontier: Possible; efficient Below Frontier: Possible; inefficient Scarcity: There is a frontier Trade-off: As make more c, make less i. Frontier slopes down. Opportunity Cost: Slope of frontier increases as c output increases.
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