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by: Gabrielle Porter

Economics215MicroWeek1Notes.pdf Econ 215-002

Gabrielle Porter

GPA 3.0

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Principles of Economics 2 The Five Foundations of Economics-Week One Notes -Purpose -Big Questions -What is Economics -Unlimited wants? Really? - Microeconomics verse Macroeconomics -Five Fo...
Principles of Economics: Microeconomics
Dr. Arnab Biswas
Class Notes
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This 6 page Class Notes was uploaded by Gabrielle Porter on Friday April 1, 2016. The Class Notes belongs to Econ 215-002 at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by Dr. Arnab Biswas in Spring 2016. Since its upload, it has received 28 views. For similar materials see Principles of Economics: Microeconomics in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.


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Date Created: 04/01/16
The Five Foundations of Economics  Purpose of the course o Provide you with the tools you need to be able to make your own assessment about the economy  Discover how the world works  Be an informed citizen  How to live your life to the fullest  Make better personal decisions  Big Questions o What is Economics?  “You can’t always get what you want”-Rolling stones  Resources are limited, while human want are limited  Scarcity  The limited nature of society’s resources o Examples: limited time; limited land; limited income  Nothing is infinite in nature---not even air and water!  People must make choices because resources are scarce  Economics o The study of how people allocate their limited resources to satisfy their nearly unlimited wants o The study of how people make decisions o Just as individuals make choices, society as a whole must make choices  Sometimes government and other organization choose for us  Unlimited wants? Really? o Which do you prefer?  $10 or $20?  One vehicle or two?  One meal a day of three?  200 gigabytes of disk space or 400? o Idea:  More is preferred to less. This leads to unlimited wants. We will generally never say “no” to have more. It doesn’t Mean we’re “greedy”  Microeconomics verses macroeconomics o Microeconomics  Concerned with decisions of individuals, households, and businesses  What happens to my consumption if I lose my job?  Jim decides to buy a house while the interest rate is low. o Macroeconomics  Looks at the broader economy, including inflation, growth, employment, interest rates, and productivity  What happens to the economy if there is widespread unemployment?  The Federal Reserve decreases interest rates to spur spending and kick start the economy  The Five Foundations of Economics o Incentives matter o Life is about trade-offs o Opportunity costs o Marginal thinking o Trade creates value  Incentives Matter o Incentives  Factors that motivate you to act or exert effort  People respond to incentives! o Positive incentives  Examples? o Negative incentives  Examples? o Play the video links below:  Direct and Indirect Incentive o Direct incentives  Generally easy to recognize  “Do my yard work and I’ll give you $40”  “Get straight A’s and I’ll give you $500” o Indirect incentives (using second example)  Maybe the child now has been given an indirect incentive to cheat!  Another indirect incentive: don’t get involved in extracurricular activities.  Untended Consequence o Unintended consequence  An unplanned result (usually negative and unwanted) of an incentive  View the links below:  v=W2hhIWbz0Ns&  shows-russians-trying-to-get-run-over-on-purpose-for- insurance-scam o Example: Unemployment benefit  Most agree that we need a safety net for those without employment  Imagine you are low-skilled and out of work. o You could get a full-time low-wage job and get $400 per week. o You could remain on welfare, and get $450 per week and not work.  Which do you choose? o Option #2 is clearly better. More pay and zero work! o It’s not that you’re lazy, you’re just intelligently responding to the indirect incentive given to you!  Incentives and Innovation o Patents and copyrights  Incentives to innovate  Why work hard, bear all costs (time and monetary) if someone could just steal your idea for profit? o Result of a strong patent system?  More innovation, since people are rewarded for new popular inventions  Innovation  economic growth, higher standards of living  Life is About Trade-offs o With scarcity, decisions incur costs o Individual examples  Go to theater: do I watch the action movie or the romantic comedy?  Go to food court: do I eat at Sbarro’s or Panda Express?  After high school: do I attend UW-Stout or UW-Madison?  Which president do I vote for?   Trade-offs and Policy o Governments face trade-offs as well  Spend tax dollars on education or the highway system?  Should we penalize polluting companies?  Gain: cleaner air, better health  Loss: less industry, higher prices in some sectors? o Different cultures may have different values. Often depends on wealth.  Opportunity Cost o Every choice you make means forgoing some other alternatives o The opportunity cost of an item is what you give up to obtain that item o The highest-valued alternative that must be sacrificed in order to get something else o Not all alternatives, just the next best choice o v=1hPg1GRQzD0& o Scarcity  Choice  Opportunity Cost  Opportunity Cost o Easy example: go to the mall or the pool?  Opportunity cost of going to the mall:  Lost opportunity to go to the pool o Opportunity cost of going to the pool:  Lost opportunity to go to the mall o Decision-making key:  Minimize opportunity cost by selecting the option that has the largest benefit. Go to whichever you enjoy more, the pool or mall.  Marginal Thinking o Economic thinking  Systematically evaluating a course of action  Requires a purposeful evaluation of available opportunities to make the best decision  Decisions require comparing costs and benefits of alternatives  Some important decisions involve an “either-or” choice  Whether to go to college or to work?  Whether to study or go out on a date?  Whether to go to class or sleep in?  Other important decisions involve “how much” choices  If you are taking two courses this semester, you must decide how much time to spend studying for each  Marginal Thinking o Marginal thinking  Evaluate whether the benefit of one more unit of something is greater than the cost  “How much” decisions require making trade-offs at the margin  If I study one more hour for an exam, by how much will my grade increase?  If a car dealer hires one more sales associate, how many more cars will the dealer sell? o Think of marginal as examining decisions “one step at a time.”  How much benefit will ONE more hour of sleep give me? What do I give up by sleeping one more hour? In other words, what are the costs of sleeping for one more hour? o Marginal changes are small, incremental adjustments to an existing plan of action. o Marginal cost is the increase in total cost (or, extra cost) from one additional unit of an activity.  Average cost is total cost divided by the number of units. o Marginal benefit is the increase in total benefit (or, extra benefit) from one additional unit of an activity.  Average benefit is total benefit divided by the number of units. o Rational people often make decisions by comparing costs and benefits at the margin (marginal benefit vs. marginal cost). o The economic decision rule:  If the marginal benefits (MB) of doing something exceed the marginal costs, do it  If the marginal costs (MC) of doing something exceed the marginal benefits, don’t do it MC>MBDon’t do it! o Basically, take an action if and only if the extra (marginal) benefits are at least as great as the extra (marginal) costs o Optimal decisions are made up to the point where marginal benefits are equal to marginal costs (MB = MC) o Costs and benefits are not just money.  Marginal Thinking Example o Suppose you are vacuuming your living room. Will you move the couch and china cabinet to vacuum underneath them? o Marginal benefits  A small additional amount of carpet is cleaned o Marginal costs  Vacuuming now takes more time and effort o Cost-benefit analysis at the margin  Do the action (move furniture) only if the marginal benefits are greater than the marginal costs  Depends on your valuation of the clean room and the time and effort it takes you to move the furniture  Trade Creates Values o Markets  Bring buyers and sellers together to exchange goods and services o Trade  The voluntary exchange of goods and services between two or more parties  Key word = voluntary  You don’t engage in trade if it makes you worse off; therefore, trade only occurs if both parties feel they gain from the trade!  Comparative Advantage o Without trade, you would have to produce everything you consume.  You would have to make your own food, clothing, housing, and electronics.  You would have to do all your own services as well (hair- cutting, plumbing, dentistry, education) o Comparative advantage o The situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor o Allows gains from trade to occur  Trade o Specialization  You go to Starbucks to get coffee  You go to the doctor when you’re sick  You don’t have to do everything yourself: people specialize in what they’re best at (lowest opportunity cost) and you can trade with them. o Trade controversies  India or China may have a comparative advantage (relative to USA) in labor-intensive goods.  Result: outsourcing of jobs  What if this causes an American worker to lose his job?


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