Ch. 1 Textbook Notes
Ch. 1 Textbook Notes Principles of Microeconomics 201
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This 3 page Class Notes was uploaded by Nikki Muenz on Sunday September 13, 2015. The Class Notes belongs to Principles of Microeconomics 201 at Truman State University taught by Terry Olson in Fall 2015. Since its upload, it has received 8 views. For similar materials see Microeconomics in Economcs at Truman State University.
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Date Created: 09/13/15
Nikki Muenz 1 Micro Econ Chapter 1 Economic Problem Scarce Resources Unlimited Wants 0 Wants are virtually unlimited resources are scarce O Scarce not freely available 0 Economics is how people use their scarce resources to satisfy wants 0 Resources are the inputs or factors used to produce goods amp services 1 Labor human effort both physical and mental 2 Capital human and physical 3 Natural resources renewable and exhaustible 4 Entrepreneurial ability 0 Entrepreneur pays resource owners wages interest and rent 0 Ent Ability is rewarded by profit 0 Resource payments have time dimensions 10 per hour 6 per year 0 Goodtangible Service intangible 0 A good or service is scarce if the amount people desire exceeds the amount available at zero price 0 Things we want none of even at a zero price are called bads 0 Four types of decision makers in economy 1 Householdplays starring role Consumers and producers 2 Firmsdemand resources households supply then use to supply goods and services 3 Government 4 Rest of world 0 Markets means by which buyers and sellers carry out exchange 0 Product markets goods and services 0 Resource markets resources ex job market 0 Circular ow model diagram that traces ow of resources products income and revenue among economic decision makers 0 Flow of resources and products supported by ow of Art of Economic Analvsis 0 Rational selfinterest each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving benefit 0 Concern for others is in uenced by same economic forces that affect other economic choices 0 Lower personal cost more we help 0 Rational choice takes time and information which are scarce 0 Rational decision makers continue to inquire info as long as the benefit will exceed the cost of gathering 0 Economic choice is based on a comparison of expected marginal benefit and cost Nikki Muenz 2 I A rational decision maker changes status quo if expected marginal benefits from the change exceeds marginal cost 0 Think of marginal as incremental not inferior 0 Microeconomics is study of your economic behavior particular markets I Macroeconomics studies the performance of the economy as a whole 0 Economic uctuations are rise and fall of economy also called business cycles Science of Economic Analysis 0 An economic theory or economic model is a simplified reality used to make predictions about the real world I Helps to understand messy and confused world 0 Scientific method 1 Identify the question and define relevant variables What is the relationship between the price of Pepsi and quantity of Pepsi purchased variables are price and quantity 2 Specify Assumptions identify variables of interest and then focus exclusively on the relationships among them I other things constant I Behavior assumptions what motivates them 3 Form Hypothesis I Theory about how key variables relate to each other I Purpose of hypothesis is to help make predictions about cause and effect in the real world 4 Test Hypothesis I Only test the variable in question control others I Either reject and modify or use until a better one shows up 0 Positive economic statement can be proved or disproved by facts I US unemployment rate is 8 I What is I Normative economic statement re ects opinion cannot be proved or disproved by facts I US unemployment should be lower I What should be I Economists explain theories by telling stories compelled with case studies witnesses data etc 0 Random actions of individuals tend to offset one another so average of large group can be predicted more accurately I Some pitfalls of faulty economic analysis 1 The fallacy that association is causation if the number of doctors rises and cancer also rises they didn t necessarily cause each other 2 Fallacy of composition belief that what is true for the individual is also true for the group Nikki Muenz 3 3 Ignoring secondary effects unintended consequences that may develop slowly over time
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