PRIN MICROECONOMICS ECON 2000
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This 36 page Class Notes was uploaded by Bethany Conn on Tuesday October 13, 2015. The Class Notes belongs to ECON 2000 at Louisiana State University taught by R. Ragland in Fall. Since its upload, it has received 14 views. For similar materials see /class/223023/econ-2000-louisiana-state-university in Economcs at Louisiana State University.
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Date Created: 10/13/15
Econ 2000 Chapter 1 Scope amp Method of Economics Chapter 1 What if I want wings that s not enough Dad Dale maybe it s time you had a primer in economics Econ 2000 liquotlilllljlilrvil ll Zl i Elm 6 llWIi va Ql will E l li39i39ljfllli l l 39 Chapter 1 What Economics is About Scarcity when wants exceed our ability to satisfy 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 people most physically fit got the meat and other people collected berries split up the jobs Several investment banks are allotted a designated portion of an IPO for selling to retail customers creating a backlog of orders Ex Facebook IPO Econ 2000 illiiziijmvul ll Zifiipz 1 Through study of society s response to scarcity the field of Economics is born The science of dealing with wants greater than the resources available to satisfy Three Key Ideas 1 People are Rational there is logic 1 There s a method to the madness if you want a big mac every day then you have your own rationale for approaching life May not be the decisions we approve of but they are seeking gain 2 People respond to incentives 1 Give incentives and you can probably induce people to take some action 2 Ex You may not want to come to class but they could put a punishment 3 Not all incentives work for every group 3 Optimal Decisions are made at the margin Econ 2000 Whinljidrvzii ll Zif Elm cm 2 People are Rational Yes crazy as it sounds Economists assume people will have rational wants and needs and generally make rational decisions Using the information available at the given time consumers and businesses will evaluate costs and benefits and More is preferred to less Better is preferred to worse Greater income or savings is preferred to less income or higher cost Econ 2000 finingva w sip vi lquot v11 i vri39ii iiwmr People respond to Incentives Incentives will change behavior If someone is rational they will modify their decisions or actions if given a positive reason to do so Ex Happy hour get people in at a time when it is normally slow Ex Coupons In some cases incentives can dement people s behavior Econ 2000 i llimplm ll up vi ll l lliiili lvir li Evcmlrrrl lr Incentives Not everyone may respond to every incentive Businesses or govt policymakers hope that enough people find the benefits sufficient to act differently For those people the increased benefit pushed them beyond their threshold of resistance That is the benefits outweighed the costs and they acted Econ 2000 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 Econ 2000 ftmntgmn w ftp vi it VfISJilt wiriijtit Evrmtrrm tr Cost and Benefits Should we eliminate all pollution It s cheap to dump everything in liver but then you get problems like dead fish Have to decide what the acceptable level of emissions is Are the emissions even harmful Should I study or go to work Should Progress City build a new deep water port These decisions are best judged in terms of costs and benefits Econ 2000 filiuiigim ii sip vi ll l lliiili ivir lbi Evcmirrri ir Decisions Made at the Margin lf 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 Econ 2000 3quotlliiiiimii ii sip vi liieissiitiviagfi ii vriiiiiirrii i Decisions Made at the Margin A marginal benefit MB occurs with each additional unit consumed Likewise marginal cost MC is what we must incur to consume that additional unit Let s do a graph Econ 2000 Jquotiiiiiim ii Zip vi ll veissilrivirgii iii Evicvi39ii39iiim i Decisions Made at the Margin Taking our analysis one step further If each costs and benefits are increasing marginally then there will exist some point where costs exceed benefit Before that though there is a level where MBMC This intersection point is the ideal level of consumption and is said to be Efficient Econ 2000 3quotlliiiijiimi ii sip vi ll l lliiili ivir lii Etcmgirri i Decisions Made at the Margin Why do want to continue exercising our choice until reaching Efficiency Goes back to the idea that we are rational we seek benefit not pain and misfortune Because we seek to maximize Utility benefit satisfaction If we stop before MBMC there remains Utility to be gained greater than the cost Econ 2000 Decisions Made at the Margin Remember the consumer faces scarcity and has wants greater than needs It would be irrational to stop attaining net positive utility when it is available Econ 2000 TradeOffs If every decision entails a cost and benefit and we can t have everything then there must be some give and take In other words if we choose to buy more of X then we might need to buy less of Y If we produce more of one good we may get less of another Econ TradeOffs Society will face tradeoffs because of scarcity We simply do not have all the workers and resources to produce everything for everyone 3 Fundamental Issues Arise 1 What goods and services will be produced 2 How will they be produced 3 Who will receive them Econ 2000 5quotliiiiljlitr39ii H Li El Opportunity Cost The highest valued alternative forfeited NOT the cost of your choice The reward lost when choosing against that which would offer it Econ 2000 illiciigimn ii Elm vi l vess lM egfrg ii Eirsjiiiglm Opportunity Cost I could be teaching you or 1 Sleep in three days a week 2 Work on some consulting project 3 Hang out at Starbucks The opportunity cost for me would likely be the lost value of whatever consulting projectl could be doing instead Econ 2000 Opportunity Cost Sleeping or hanging out is a viable alternative but do not produce more value than some form of work Assuming that is derive more utility from work than rest Econ 2000 Opportunity Cost Now supposing I also work as a late night neuro surgeon raking in big money I get paid very well but must work until 5 in the morning Sleep and rest now take a higher value in my life now you don t have time for anything Thus the opportunity cost of teaching is likely now the lost rest I could be enjoying What is most valuable to us is not always money you must look at the individual Secondary job vs free time when you make a lot of money and don t have much time free time probably takes priority Econ 2000 Opportunity Cost No Such Thing as a Free Lunch All choices entail something picking one over the other Anytime you pick something that is free you are not doing something else Ex going to Destin for free there is still a tradeoff like missing school or work Resources will be spent in every action meaning they could have been invested in an alternative action The result is an opportunity foregone Econ 2000 5quotliiiziljidnzi39r ll me Zip vi ir veuwv1i i v ciiiig irm i Economic Structure If everyone can t have everything and choices must be made as to what is or is not produced some overriding method will arise to make these decisions within a society The economic structure within a society can veer towards of the spectrum 1 Centrally Planned Economy Command Economy 1 Communism don t see as much anymore 1 Soviet Union 2 In pure sense we would have body of rulers and administrative tier X number of ppl need so much food so we need so many farms and they need so much food and that is how it is planned 3 But how do you react to unplanned event and it doesn t really take into account personal incentives Market Economy not going to have central planners 1 Private companies and individuals make certain goods like a cool shoe and hope that it will sell well 2 2 Don t really see either pure central or market economy in practice Econ 2000 fililnigllmn ll Sip vi Eli vll i39ljjillll l li Economic Structure Centrally Planned Economy Government rulers decide what is produced how resources are utilized and how people interact within the economy Market Economy Resource allocation and production are determined by firms and households interacting in markets within a society Econ 2000 5quotllimljlilrvzil ll V Economic Structure Mixed Economy an economy neither perfectly controlled nor fully free of government involvement Some societies are more free others are more controlled The US is a mixed economy closer to a free market than most European nations Econ 2000 3quotllimmm ll Glyn vi ll VlISJIilFlvirigflli Evrmrrrl lr Efficiency Ideally two types of efficiency will be attained Productive Efficiency goods andor services are produced at the lowest possible cost Allocative Efficiency every good or service is produced right up to the point where MC MB Resources would not be better utilized elsewhere Econ 2000 Allocation in a Market Resources used as inputs in good production are scarce as well Therefore goods can not be produced in unlimited quantities Everyone wants a Fiet but there just is not enough tenderloin to go around How then do we determine who will receive the good and who will not Econ 2000 J llillijvinw ll Zip vi a firsl39lrlgflm i Allocation in a Market 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 Free Spock Ears at a Trekkie Convention Throngs of fanatics suddenly appear to grab a pair What conditions exist and what is the likely outcome Econ 2000 f llillvtrxrr U fir i vii lr vussjme1i will Egcmg lm l Allocation in a Market Two people are available to hand out the Spock ears They have a lotto give out but it takes time The Star Trek fanatics are a rabid bunch but the Spock ears provide each with a differing utility Fanatics begin to gather around and a line takes form The ears are free but the cost to receive them is the wait Econ 2000 Allocation in a Market This wait serves as the rationing device Only those who derive the most utility from the free ears will wait others will pass and exit the line Another example might be a new popular restaurant There was no way PF Changs Kona Grille or even a Red Lobster in Louisiana could serve everyone who tried to go during the first month Econ 2000 Positive Normative amp Descriptive Economics Positive economics focuses upon that which is data driven observation driven less theory Normative economics is concerned with what should be more theory more hype and emotion lots of normative economics in Presidential elections Unemployment is high country is slowing that s why we should not reelect Obama example of normative Descriptive economics is the compilation of data that describe phenomena and facts Econ 2000 Positive Economics What is 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 Econ 2000 3quotllillimvui ii sip vi liieissilhviagfi li vrililiirrll l Normative Economics What should be 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 Why Because any more than that goes against the idea of small government and a dynamic free market Econ 2000 fililnlgllmn ll ftp vi 1 739 1 39i gilrrrl l Microeconomics vs Macroeconomics Micro is concerned with the primary elements of an economy that is an individual a firm a particular industry or specific market Can look at one industry by itself ex labor Won t look at what the economy is doing as a whole Consumer choice looking at the individual Can talk about how energy policy effects oil production but when you get into broader concepts it s macro Macro studies the economy as a whole firms and individuals reacting to scarcity in the collective sense Econ 2000 quotlillll ilrvil ll V Microeconomics Individual referred to as consumer level economic activity Individual firm s behavior The Firm is generic term for a single business unit Firms engage in market Industry of similar firms Single markets comprised of individuals or firms within a similar business sector Each market has forces of supply and demand Econ 2000 Macroeconomics The economy at large The nation s economy World economic growth An economic market not subdivided into industry groups Issues may involve exchange rates capital investment mass labor markets or trade There s some gray areas for where to make the out between macro and micro Econ 2000 friliuwgilnui iii fir i vii li vussiltlaegii nil Egciiriiim i Ceteris Paribus All Other Things Held Constant The effect of a change in an assumption or condition may only be measured if all else is equal when looking at markets and situations we need to isolate certain variables so we want to look at conditions such that all things equal if one factor changes what happens to the market for this good The relationship between variables will be tested holding conditions ceteris paribus Econ 2000 7quotliliillfiiir39ii ll fir i 5 il vllsr39liliivivi fi will Evici39ii iiirrri i Ceteris Paribus Ex Romper Room a new bar targeting freshmen who enjoy sweet drinks and fighting is trying to determine where the right cover charge should be set The manager a 34 yr old dropout who never left Tigertown heard you took econ and asks for your help setting cover on weekends in the Fall What do you advise SEC home game weekends are not the same as away game weekends Thus a high cover charge only makes sense on certain weekends To assume all weekends would have the same traffic as the Alabama game would be silly All things equal pick a base cover suitable for most typical nights
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