Ch. 1 Notes
Ch. 1 Notes EC 110
Popular in Microeconomics
Popular in Economics
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This 3 page Class Notes was uploaded by Grace Heinerikson on Friday September 30, 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 12 views. For similar materials see Microeconomics in Economics at University of Alabama - Tuscaloosa.
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Date Created: 09/30/16
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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