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Modern Economics

by: Brittney Rude

Modern Economics Economics 100

Brittney Rude

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About this Document

Weeks 1 and 2 (approximate)
Modern Economics
John Walker
Class Notes
Econ, Economics, river, Falls, Technology, empirical, method, competitive, market, opportunity, cost, demand, supply




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This 3 page Class Notes was uploaded by Brittney Rude on Sunday October 9, 2016. The Class Notes belongs to Economics 100 at University of Wisconsin - River Falls taught by John Walker in Fall 2016. Since its upload, it has received 6 views. For similar materials see Modern Economics in Economics at University of Wisconsin - River Falls.


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Date Created: 10/09/16
What is economics? Economics is concerned with the “impact of the unlimited human wants upon limited resources of nature” or “the way scarce resources are allocated among alternative uses to satisfy human wants” Simply put, economics is focused on dealing with the problem of scarcity. Basic Human Wants: goods & services, food, shelter, clothing, leisure time, Where Resources Include: land, air, water, labor, capital (scarce resources) A key ingredient is technology. Technology is our “know-how” or the “known means and methods available for combining scarce resources to provide goods and services” The Method of Economics -How do economists conduct economic science? -How do economists contribute to knowledge in the field of economics? They develop theories about the economy, abstract from reality and focus on the most important variables. The Empirical Method: 1. Develop reasonable assumptions about the economy 2. Identify the categories and variables 3. State the hypothesis of the relationship between the variables 4. Collect data to test the hypothesis Objective: Not having any bias Joseph Schumpeter vs. Gunnar Myrdal Schumpeter states: Empirical method allows economists to be objective. He acknowledged bias in step 1. He called it “pre-analytic vision” - the subjective bias of the theorist. Simply stated, science can advance because we establish the real facts in step 4. Myrdal states: that we can establish the facts, however there will be values in the facts, thus, economics (and the Empirical Method) cannot be objective in a strict sense. “Impartial.” Positive Economics: facts, value-free Normative Economics: values and opinions Scarcity and Opportunity Cost (OC) Opportunity Cost: what we must give up in order to obtain more of something else OC and Social Choice The Production Possibilities Frontier (PPF) Assume… 5. Society produces two goods, guns and butter 6. Technology is constant 7. Resources are constant Social Choice and OC The Competitive Market In mainstream economics, the central institution is the market - which performs 3 functions 8. Determines price and income 9. Directs production and allocation of goods and services 10. Automatically adjusts to changes and circumstances Consumer Demand Central to the analysis of demand is “The Law of Demand” which indicates an inverse relationship between price and the quantity demanded of a good; all else equal (ceteris paribus) Movement in a demand curve is a change in quantity demanded Other things that influence the demand are called determinants of demand. Determinants 11. Change in people’s taste and preferences 12. Change in people’s income a. Normal good: if income increases, you buy more (filet mignon) b. Inferior good: if income increases, you buy less (ramen) 13. Prices of substitute and complementary goods 14. Change in people’s expectations about the future 15. Other Supply of Producers Central to the analysis of supply is “The Law of Supply” which indicates a direct relationship between a price of a good and quantity supplied; all else equal (ceteris paribus) Determinants of Supply 16. Cost of production a. Technology b. Prices of inputs 17. Entry/Exit of firms 18. Other Market Equilibrium When supply and demand curves intersect; the quantity demanded and the quantity supplied are the same. Price of Corn Quantity Supplied Quantity Demanded $4/Bushel 40 bushels 20 bushels $3/bu 30 bu 30 bu $2/bu 20 bu 40 bu In the first scenario ($4/bu) there is a surplus because the market only demands 20 bushels but 40 were produced. In the last scenario, there is a shortage because the market demands 40 bushels but only 20 were produced. In the middle, equilibrium was achieved because the amount demanded was the amount produced. With a surplus, producers compete and price falls until equilibrium is reached. With a shortage, consumers compete and price grows until equilibrium is reached.


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