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EC 110 Ch. 1 Notes

by: Grace Heinerikson

EC 110 Ch. 1 Notes EC 110

Grace Heinerikson
GPA 4.0

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About this Document

These notes are for Ch. 1: What Is Economics? from the Microeconomics: Principles and Policy 13th Edition (Baumol) book assigned by Dr. Tao Chen Yeh for the EC 110 course at the University of Alabama.
Dr. Tao Chen Yeh
Class Notes
Microeconomics, EC, 110
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This 3 page Class Notes was uploaded by Grace Heinerikson on Thursday September 29, 2016. The Class Notes belongs to EC 110 at University of Alabama - Tuscaloosa taught by Dr. Tao Chen Yeh in Fall 2016. Since its upload, it has received 71 views. For similar materials see Microeconomics in Economics at University of Alabama - Tuscaloosa.


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Date Created: 09/29/16
Chapter 1:What Is Economics? Vocabulary:  Economics:a socialscience thatstudieshumanbehaviorandthechoices peoplemake underconditionsofscarcity.  Microeconomics:the studyof the decisionsofindividualconsumersand businessesandtheinteractionofthosedecisionsinmarkets.  Macroeconomics:the studyofthe entireeconomy.It seeks to explain aggregate output,price,andemploymentandothereconomy-wide variables.  FundamentalMicroeconomicProblems: 1. Whatgoods andservices shouldbeproducedandinwhat quantities? 2. How shouldthesegoodsbe produced? 3. How shouldthesegoodsbe distributed?  EconomicModel:a simplified,small-scaleversionofsome aspectofthe economy.Often expressedinequations,bygraphs,or inwords.  Theory:a deliberatesimplificationofrelationshipswhosepurposeisto explainhowthoserelationshipswork.  PositiveEconomics:anattemptto describethingsas theyare, notas they“shouldbe”.Descriptivein nature.  NormativeEconomics:an attempttodescribe whateconomicpolicy shouldbe.Prescriptiveinnature. Main Ideas:  Scarcity: the fundamentaleconomicproblem. o Everythingis limited(e.g. time,money). o Microeconomicsstudieshowpeoplein a free market make choices underscarcity. o Resourcesare scarce, leadingto economicdecisions.  Microeconomicsvs. Macroeconomics: o Microeconomicsis the studyofindividualunitsintheeconomy in regardsto scarce resources,andhowthesedecisionsinteract. o Macroeconomicsis the studyofthe entireeconomy(no individuals)andhowoutput,priceandemploymentaffectthe economy(policymaking).  FundamentalMicroeconomicProblems: o In a free market,thereare three (3) maindecisionsthe individualmustmake:  Whatto produce(andhowmuch to produce)  How to producethem  How to distributethemamongsttheeconomy o These decisionsarecausedentirelybythe existenceofscarcity (wants willalways exceed resources).  Price: o If goodscan be soldin a market,thenthey havea price tag. o Price serves as a signal– highprice for high incomegroup,low price for lowincome group. o In thisway, price is directlycorrelatedwiththe 3 FMP; price signalshowthegoods oughtto be distributed.  EconomicModels: o These are effectivebecausetheyare simplifiedandcertain factors are assumedawaytoshowthe crucialparts ofthe interactionbeinganalyzed. o Includeequations,graphsandwords. 2 o Goodmodelswilltake awayunnecessarycomplicationswithout losingthe crucialaspects ofthe relationshipbeinganalyzed. o Works to helpdevelopeconomictheories.  Theories: o A theoryuses simplificationtoexpresshowa relationshipworks withoutthecomplexityofthe actualrelationship(ageneral summarization). o Like a goodmodel,a good theorywill assumeawayunimportant aspectsto create a larger theme. o E.g. Whenprice goes up,demandgoes down.  PositiveEconomics: o Positivedescribeshowthe economyactuallyis,thusmakinga descriptivestatementthatistrue abouttheeconomy. o Usuallyinthe form ofa theory,usingeither‘may’or ‘will’. o E.g. Free trade tendstobenefitbothcountriesinvolved.  NormativeEconomics: o Normativedescribeshowthe economyoughtto be and prescribesa certain policyinorder to obtainatheorizeddesired outcome. o Includesthe words‘should’or‘shouldnot’inan attemptto influencepolicy. o Normativenotonlydescribesthe relationshipbetweentwo factors inthe economy,butalsomakes an assumptiononthe betteroptionforthe economy. o E.g. The U.S.shouldincreasefree tradein order tobenefititself andthe countriesittradeswith. 3


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