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Principles of Economics

by: Abraham Schoen

Principles of Economics ECON 2101

Abraham Schoen
GPA 3.78

John Connaughton

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John Connaughton
Class Notes
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This 36 page Class Notes was uploaded by Abraham Schoen on Sunday October 25, 2015. The Class Notes belongs to ECON 2101 at University of North Carolina - Charlotte taught by John Connaughton in Fall. Since its upload, it has received 38 views. For similar materials see /class/229015/econ-2101-university-of-north-carolina-charlotte in Economcs at University of North Carolina - Charlotte.


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Date Created: 10/25/15
The Production possibilities model is a model that shows the goods and services that an economy is capable of producing its opportunities given the factors of production and the technology it has available An economic system is the set of rules that define how an economy s resources are to be owned and how decisions about their use are to be made i 3 E A l E39 l3lEllEliETEQl bx KN l x F faer Learning Objectives 1 Define the three factors of production labor capital and natural resources 2 Explain the role of technology and entrepreneurs in the utilization of the economy s factors of production J 5mg l bx f J 5 lEillEitlliUlliliil 1 7 r x quotlf wgl 3L lql Wl lllml ll I l LquotJ IJ gtgt A Factors of production land labor capital and entrepreneurship are the resources available to the economy for the production of goods and services 0 Utility is the value or satisfaction that people derive from the goods and services they consume and the activities they pursue Labor is the human effort that can be applied to the production of goods and services Capital is a factor of production that has been produced for use in the production of other goods and services Financial capital includes money and other paper assets such as stocks and bonds that represent claims on future payments Physical capital includes tools of production such as tractors for farming screwdrivers hammers roads and bridges Natural resources are the resources of nature that can be used for the production of goods and services Human capital are the skills a worker has as a result of education training or experience that can be used in production Technology is the knowledge that can be applied to the production of goods and services An Entrepreneur is a person who operating within the context of a market economy assumes various risks in the hopes of earning profits by finding new ways to organize factors of production Learning Objectives 1 Explain the concept of the production possibilities curve and understand the implications of its downward slope and bowed outshape Use the production possibilities model to distinguish between full employment and situations of idle factors of production and between efficient and inefficient production Understand specialization and its relationship to the production possibilities model and comparative advantage I E 3173 E The production possibilities curve is a graphical representation of the alternative combinations of goods and services an economy can produce It describes opportunity costs and tradeoffs A Production Possibilities Curve Production possibilities curve for plant 1 20C The table shows the combinations of pairs of skis and snowboards that Plant 1 is capable of producing each month These are also illustrated With a production possibilities 3 curve Notice that this 1 5a 100 curve IS linear Sawwdslmmmh 1130 7 Pairs of slits per month Pairs of skis per month H O O I Snowboards per month 39Paiia s afs s ki s par marith 19quot Aan 15 0 1 19 o 1 j 76 a 0 I Yl39l39 25quotquot 22 Comparative Advantage and the Production Possibilities Curve A comparative advantage in producing a good or service is the situation that occurs if the opportunity cost of producing that good or service is lower for that economy than for any other Pairs of skis per month 350 300 7 250 200 150 100 50 w A Plant 3 L Plant 2 C Plant 1 D O 100 200 300 Snowboards per month 23 The Law of Increasing Opportunity Cost The law of increasing opportunity cost states that as an economy moves along its production possibilities curve in the direction of producing more of a particular good the opportunity cost of additional units of that good will increase Pairs of skis per month 350 300 a 250 200 150 100 i 50 200 Snowboards per month 400 Movements along the Production Possibilities Curve Security SA All other goods and services 25 Producing on Versus Producing Inside the Production Possibilities Curve Security All other goods and services Efficient versus Inefficient Production Pairs of skis per month 350 N O O 01 O x O 0 U1 O O 0 Efficient quot 3 production 9 2 B Inefficient production D 0 100 200 300 Snowboards per month South America Production Possibilities CompMem 200 B 100 C 0 Europe s Production Possibilities CompMem D 400 200 0 Production Possibilities Curves and Trade Food per 0 200 400 Food 0 100 200 World Production Possibilities CompMem 600 H 400 l 0 Food 0 400 600 600 I 500 D H 400 1 Price per pound L O o N O O A 100 Q E r B 39 5 F C I 0 100 200 300 400 500 600 Quantity millions of pounds per month Unattainable with initial levels of inputs and technology 19482002 Sources of US Economic Growth Years Years 1948 2002 Increase in quantity of labor Increase in quantity of capital Increase In quality of labor Increase in quaIity of capital Improved technology Years 1948 1973 Increase in quantity of labor Increase in quantity of capital Increase In quality of labor Increase in quaIity of capital Improved technology Percentage contribution Period growth rate 21 41 10 15 44 11 5 399 Years 1973 1989 Increase in quantity of labor Increase in quantity of capital Increase in quality of labor Increase in quality of capital Improved technology Years 19891995 Increase in quantity of labor Increase in quantity of capital Increase in quality of labor Increase in quality of capital Improved technology Years 1995 2002 Increase in quantity of labor Increase in quantity of capital Increase In quality of labor Increase in quality of capital Improved technology 31 7 139296 3 26 33 16 We 19 8 5 417 20 A comparison of Economic systems Market M39Xed Command capitalist socialist economies economies economies Market capitalist economy Economy in which resources are generally owned by private individuals who have the power to make decisions about their use 0 Command socialist economy centrally planned Economy in which government is the primary owner of capital and natural resources and has broad power to allocate the use of factors of production 0 Mixed economy Economy that combines elements of market capitalist and command socialist economic systems Economic Freedom and Per Capita Income 2003 Per Capita GDP in Purchasing Power Parities x 60000 0 Asia and the Paci c l Latin America and the Caribbean 50000 A North Africa and the Middle East x North America and Europe x Sub Saharan Africa 40000 x x X 30000 X XX Xxxx x gt x x39 f 20000 A X A x A 8 39 W I x x 5 x x 10000 x I X 910 x A x xlixxgtlt ill I I r quotI X x I e174 L OI 39 mack ampamp x XX i 500 Repressed 400 Mostly Unfree 300 Mostly Free 200 Free 100 2005 Index of Economic Freedom Ijrllx o In a market economy interactions of individual buyers and sellers determine where on a production possibilities curve an economy will produce 0 Governments also intervene in economies to change how what and for whom an economy produces Tax expenditure and redistribution policies encourage production and consumption of some goods and discourage others eg cigarettes homes education national defense J El 1 9 iziiiw quotfl Learning Objectives 1 2 Define economics Explain the concepts of scarcity and opportunity cost and how they relate to the definition of economics Understand the three fundamental economic questions What should be produced How should goods and services be produced For whom should goods and services be produced 2 7 an r5 it ll JLQl La 39739 qllil I I 19 than I o 17 Li vimJ 39 lin Evy JIlllll9il 3quot ii 0 Economics is a social science that examines how people choose among the alternatives available to them 0 Scarcity is the condition of having to choose among alternatives 0 A scarce good is a good for which the choice of one alternative requires that another be given up 0 A free good is a good for which the choice of one use does not require that another be given up eg when you use gravity it does not prevent your neighbor from using gravity What should be produced How should goods and services be produced For Whom should goods and services be produced Opportunity cost is the value of the best alternative forgone in making any choice eg If you were not in college you could have spent the money for tuition fees and books on other things Additionally you could have used your time spent studying and attending class on other things Learning Objectives 1 Explain the distinguishing characteristics of the economic way of thinking 2 Distinguish between microeconomics and macroeconomics o A choice at the margin is a decision to do a little more or a little less of something The Margin is the current level of an activity eg suppose I run a t shirt shop I currently produce 500month and it costs me 700 in machinery labor and materials to do so If I produce 600month next month and my costs increase to 750 then given I am initially producing SODmonth the marginal cost of the next 100 shirts is 50 o Microeconomics is the branch of economics that focuses on the choices made by consumers and firms and the impacts those choices have on individual markets Macroeconomics is the branch of economics that focuses on the impact of choices on the total or aggregate level of economic activity ggl 3923 g sii um Economics majors typically have a wide range of employment opportunities Careers Economists work in government for businesses and in colleges and universities Applying economics to other fields When taking LSAT exams economics majors on average are among the highest ranking students Average salary offers for economics majors are also among the highest across the disciplines Tia El Learning Objectives 1 Explain how economists test hypotheses develop economic theories and use models in their analyses Explain how the allotherthings unchanged ceteris paribus problem and the fallacy of false cause affect the testing of economic hypotheses and how economists try to overcome these problems Distinguish between normative and positive statements A variable is something whose value can change A constant is something whose value does not change The scientific method is a systematic set of procedures through which knowledge is created A hypothesis is an assertion of a relationship between two or more variables that could be proven to be false mail El lazljltillivil lL FEET A theory is a hypothesis that has not been rejected after widespread testing and that wins general acceptance A law is a theory that has been subjected to even more testing and that has won virtually universal acceptance I A l r EG WW ff rs 3 m mm A model is a set of simplifying assumptions about some aspect of the real world Economic models describe relationships among economic variables price and quantity of a good for example They help us understand the economy and help us generate hypotheses about the economy 32 Testing Hypotheses in Economics When making a hypothesis economists assume other factors are held constant Ceteris paribus is a Latin phrase that means all things being equal Hypotheses in economics typically specify a relationship in which a change in one variable causes another to change A dependent variable is a variable that responds to a change while an independent variable is a variable that induces a change A positive statement is a statement of fact or a hypotheses A normative statement is a statement that makes a value judgment


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