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Basic Economics

by: Hayden Hirthe

Basic Economics ECO 1000

Hayden Hirthe
GPA 3.85

Edward Ford

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Edward Ford
Class Notes
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This 5 page Class Notes was uploaded by Hayden Hirthe on Wednesday September 23, 2015. The Class Notes belongs to ECO 1000 at University of South Florida taught by Edward Ford in Fall. Since its upload, it has received 28 views. For similar materials see /class/212689/eco-1000-university-of-south-florida in Economcs at University of South Florida.


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Date Created: 09/23/15
What Economics is about Economics The science of scarcity the science of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants Topic De nitions Opportunity Cost The most highly valued opportunity or alternative forfeited when a choice is made Scarcity when wants exceed our ability to satisfy Decisions at the Margin Decision making characterized by weighing the additional marginal benefits of a change against the additional marginal costs of a change with respect to current conditions Efficiency Exists when marginal benefits equal marginal costs Equilibrium Equilibrium means quotat restquot it is descriptive of a natural resting place Ceteris Paribus A Latin term meaning quotall other things constantquot or quotnothing else changesquot A condition faced by living creatures since the dawn of time Nog the caveman dreams of sitting in a cave full of meat but it takes too long to make the number of arrows needed Several investment bankers are allotted a designated portion of an IPO for selling to retail customers creating a backlog of orders Through study of society s response to scarcity the field of Economics is born Positive vs Normative Economics Positive economics focuses upon that which is What isquot refers to economic study based upon observable and tested phenomenon Cause and Effect Based upon collected data we know sales will rise 10 if prices are lowered 5 Emphasis on reality not opinion or conjecture Normative economics is concerned with what should be quotwhat should bequot refers to that study concerned with advancing ideals and values More philosophical than empirical No one should pay more than 25 of their earnings in taxes llwhyll Because any more than that goes against the idea of small government and a dynamic free market Microeconomics vs Macro Microeconomics is concerned with the primary elements of an economy that is an individual a firm a particular industry or specific market Macroeconomics studies the economy as a whole firms and individuals reacting to scarcity in the collective sense Micro economics Individual referred to as consumer level economic activity Individual Firms Behavior quotThe Firmquot is generic term for a single business unit Industry of similar firms Single markets comprised of individuals or firms within a similar business sector Macro economics The economy at large The nation39s economy leClConverterInpu 5QduKuanQDltt7172010 13341 AM World economic growth An economic market not subdivided into industry groups Issues may involve exchange rates capital investment mass labor markets or trade Major concepts this course will cover Economics discussions frequently revolve around recurring ideas and concepts The sooner you are able to understand them the better you will understand the course material Scarcity How do we better describe our response to scarcity If there exists something capable of relieving our cravings then we have attained Utility satisfaction of our want good The car we drive to work A new shirt that makes you feel stylish Goods those items providing utility To achieved the desired utility we expend our available resources on goods These goods may be tangible or intangible Tangible Objects or specific service Intangible Happiness Wellbeing But if something causes us harm or dissatisfaction we have then encountered a quotBADquot Tangible Pollution Sewage Intangible Pain and misery Goods must be produced requiring resources The car won t appear by itself Disutility The dissatisfaction one receives from a bad Bad Anything from which individuals received disutility or dissatisfaction 4 TYPES OF RESOURCES Land physical space natural resources Labor talents people contribute to production process Capital Money Entrepreneurship business savvy Resources are utilized in differing combinations for each and every good Resources used as inputs in good production are scarce as well Therefore goods can not be produced in unlimited quantities Everyone wants a Filet but there just is not enough tenderloin to go around How then do we determine who will receive the good and who will not Rationing Devices are introduced Such devices may take the form of a price expressed in currency or exchange or a deterrence such as a line These are naturally occurring EX Someone yells quotFree Spock Earsquot at a Trekkie Convention Throngs of fanatics appear to grab a pair What conditions exist and what is likely the outcome Rationing Device a means for deciding who gets what of available resources and goods Ex Money currency Looks quotif only the pretty people were let into the gamequot Competition exists because of scarcity leClConve1terInpuU5QduKuanQDltt7l72010 13341 AM Opportunity Cost The highest valued alternative forfeited NOT the cost of your choice The reward lost when choosing against that which it would offer it quotPRICE is RIGHTquot Examples With the first spin at the wheel you land the 100 spot assuring a place in the Showcase Showdown The decision of the showcase is the opportunity cost Teaching example Sleep 3 days a week Work on some consulting project Hang our at Starbucks Now neurosurgeon Example Get paid very well but must work until 5 in morning Sleep and rest take a higher value in my life Thus the opportunity cost of teaching is likely to subside No such thing as a Free Lunch All choices entail someone picking one over the other Resources will be spent in every action meaning they could have been invested in an alternative action The result is an opportunity foregone Cost and Benefits If individuals firms and societies are rationale they consider only those choices providing utility a benefit And if we know all choices entail an opportunity taken or lost then there must always be a cost Thus every choice offers a cost and a benefit As such economic theory suggests all decisions should be evaluated on the basis of costbenefit analysis Ex Should we eliminate all pollutions Should I study or go to work Should Progress City build a new deep water port These decisions are best judged in terms of cost and benefits Decisions Made at Margin If choices are evaluated on the basis of costs and benefits then it stands to reason the following question will frequently arrive To what extent or quantity is a choice good The decision is made based upon whether the additional benefit continues to outweigh the additional cost Think of Marginal as meaning quotAdditionalquot in economics Marginal Benefits MB Additional Benefits The benefits J to 39 an T 39 unit of a good or undertaking one more unit of an activity Marginal Cost MC Additional Costs The costs J to 39 an T 39 unit of a good or undertaking one more unit of an activity Efficiency Taking our analysis one step further If each costs and benefits are increasing marginally then there will exist some point where costs exceed benefit But before that there is a level where MB MC This intersection point is the ideal level of consumption and is said to be quotEfficientquot In economics the quotright amountquot of anything is the quotoptimalquot or quotef cientquot amount and the efficient amount is the amount for which the marginal benefits equal the marginal costs Why do we want to continue exercising our choice until reaching Efficiency Bc we seek to maximize Utility benefit satisfaction If we stop before MBMC there remains Utility to be gained greater than cost Remember the consumer faces scarcity and has wants greater than needs It would be irrational to stop attaining net leClConve1terInpu 5QduKuanQDltt7172010 13341 AM positive utility when it is available Back to graph Unintended Consequences Decisions and choices exercised may produce secondary results not intended by the deciding party Economists frequently discuss this concept when speaking of government policy and law If unemployment bene ts were raised very high more people would have less incentive to work Suppose all students were told LSU would no longer require any exams Who would study Society places a value on the appearance of beauty and health People resort to tactics that are neither pretty nor healthy EX Boy makes 515 an hour If minimum wage gets raised to 750 the boy will make more but the unintended consequence is that the employer might not want to employ the boy anymore because he cannot afford it So the unintended effect of raising minimum wage is the boy losing his job Equilibrium Economic activity tends toward a natural level known as an equilibrium A market reaches equilibrium when supply equals deman Prices may be set by markets seeking equilibrium Ex Painter has a painting for sell for 5000 Three people are willing to pay that much Two people are willing to pay 6000 And one person is willing to pay 6500 In other words the bidding activity of the buyers has moved the price of the painting to its natural resting place or to an equilibrium price of 6500 Look at the MCMB graph the third hour of studying would be equilibrum Ceteris Paribus quotAll Other Things Held Constantquot Ceteris Paribus The effect of a change in an assumption or condition may only be measured if all else is equal The relationship between variables will be tested holding conditions ceteris paribus Ex Romper Room a new bar targeting freshmen who like lots of sweet drinks and fighting is trying to determine where the right cover charge should be set The manager a 34 year old dropout who never left Tigertown heard you took econ and asks for your help What would you advise Keep conditions of bar the same Association vs Causation Association events some common elements such as timing or sequences The events however closely linked through are independent of one another Causation occurs when one event triggers the next There exists a relationship between events such that the second would not exist without the first There is a dependent relationship Bad analysis will lead to arguments suggesting causation when only association exists Examples Banning rap would eliminate crack use I started buying coke every Friday from the vending machine They must have caught on because the price went up You want to wash your car at 1000 am and it rains at 1030 am Washing your car DID NOT CAUSE THE RAIN If A occurs before B it does not mean it does not mean that A caused B Group vs Individual Fallacy of composition exists when it is assumed what is good or true for the individual would be good or true for the group Examples The way to get ahead in life is to become a programmer Let us all become programmers leClConve1terInpuU5QduKuanQDltt7l72010 13341 AM I saved a lot of money buying my car out of town Everyone should buy out of town Fallacy of composition erroneous view that what is good or true for the individual is necessarily good or true for the group Economic Example Some people argue that tariffs bene t certain industries by protecting them from foreign competition They then conclude that because tariffs benefit some industries the economy as a whole benefits from tariffs This is not true leClConve1terInpu 5QduKunWJQDltt7172010 13341 AM


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