Week 1 - Principles of Microeconomics Reading Notes
Week 1 - Principles of Microeconomics Reading Notes ECON:1100:0AAA
Popular in Principles of Microeconomics
Popular in Economcs
This 4 page Class Notes was uploaded by Kelsy Lartius on Saturday January 31, 2015. The Class Notes belongs to ECON:1100:0AAA at University of Iowa taught by Stacey Brook in Spring2015. Since its upload, it has received 254 views. For similar materials see Principles of Microeconomics in Economcs at University of Iowa.
Reviews for Week 1 - Principles of Microeconomics Reading Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 01/31/15
Principles of Microeconomics Reading Notes Week 1 Chapter 1 Reading 10 Principles of Economics 0 economy gt oikonomos meaning quotone who manages a householdquot 0 scarcity the limited nature of society39s resources society can39t produce all the goods and services people wish to have economics the study of how society manages its scarce resources The Ten Principles of Economics 0 People face tradeoffs I making decisions requires trading off one goal against another I ex allocating money in a household 0 food clothing vacation retirement college education 0 saving for college education means not using it for vacations I classic tradeoff is quotguns and butterquot the more a society spends on national defense guns the less it can spend on consumer goods butter I efficiency the property of society getting the most it can from its scarce resources I equality the property of distributing economic prosperity uniformly among the members of society 0 The cost of something is what you give up to get it I comparing costs and benefits of alternative courses of action I opportunity cost whatever must be given up to obtain some item 0 Rational people think at the margin I rational people people who systematically and purposefully do the best they can to achieve their objectives I marginal change a small incremental adjustment to a plan of action I rational people often make decisions by comparing marginal bene ts and marginal costs 0 People respond to incentives I incentive something that induces a person to act 0 crucial to analyzing how markets work 0 Trade can make everyone better off I the American and Chinese economies are competitors but only partly because trade between the two countries can actually make each country better off I trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services 0 Markets are usually a good way to organize economic activity I market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services o no one looks out for the economic wellbeing of society as a whole primarily interested in their own wellbeing 0 despite this market economies prove to be successful 0 Governments can sometimes improve market outcomes we need the government to enforce rules property rights the ability of an individual to own and exercise control over scarce resources market failure a situation in which a market left on its own fails to allocate resources efficiently externality the impact of one person39s actions on the wellbeing of a bystander o expoHu on market power the ability of a single economic actor or small group of actors to have a substantial influence on market prices 0 ex only one well in town so the owner isn39t subject to competition with other well owners therefore she can charge a higher price 0 A country39s standard of living depends on its ability to produce goods and services productivity the quantity of goods and services produced from each unit of labor input 0 Prices rise when the government prints too much money inflation an increase in the overall level of prices in the economy 0 Society faces a shortrun tradeoff between inflation and unemployment many economic policies push inflation and unemployment in opposite directions business cycle fluctuations in economic activity such as employment and production Chapter 2 Reading Thinking Like an Economist The Economist as Scientist o trying to explain the world gt scientist economist o The Scientific Method Observation Theory and More Observation 0 in economics conducting experiments is often impractical 0 must look to the natural experiments such as the war in the Middle East observing what goes on o The Role of Assumptions 0 assumptions can simplify the complex world and make it easier to understand 0 Economic Models 0 diagrams and equations 0 omit many details to allow us to see what39s truly important 0 models are built with assumptions 0 Our First Model The CircularFlow Diagram o circularflow diagram a visual model of the economy that shows how dollars flow through markets among households and firms 0 factors ofproduction inputs such as labor land and capital buildings and machines households own these and the consume all the goods and services that use inputs that the firms produce 0 Our Second Model The Production Possibilities Frontier 0 production possibilities frontier a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology 0 efficient outcome the economy is getting all it can from the scarce resources it has available 0 inefficient outcome for some reason ex unemployment the economy is producing less than it could from the resources it has available 0 infeasible outcome no matter how resources are allocated between industries the economy cannot produce that much 0 Microeconomics and Macroeconomics o microeconomics the study of how households and firms make decisions and how they interact in markets 0 macroeconomics the study of economywide phenomena including inflation unemployment and economic growth The Economist as Policy Adviser o sometimes economists are asked to recommend policies to improve economic outcomes trying to improve the world gt policy adviser economist Positive Versus Normative Analysis 0 positive statements claims that attempt to describe the world as it is o normative statements claims that attempt to prescribe how the world should be 0 key difference between positive and normative is how we judge their validity o Economists in Washington 0 Since 1946 the POTUS has received guidance from the Council of Economic Advisers 0 Congressional Budget Office staffed by economists 0 Federal Reserve 0 Why Economists39 Advice is Not Always Followed 0 Many other advisers advise the president so many other factors are in play in the real world the POTUS can39tjust go with the economic adviser without consulting his political advisers his communications advisers etc Why Economists Disagree 0 Two basic reasons 0 Economists may disagree about the validity of alternative positive theories about how the world works O Economists may have different values and therefore different normative views about what government policy should aim to accomplish 0 Differences in Scientific Judgements 0 economics is a young science there is still much to be learned so people disagree about things sometimes because they have different hunches about the validity of alternative theories or about the size of important parameters that measure how economic variables are related disagreement between households being taxed based only on consumption spending and households being taxed on income too the current state 0 Differences in Values 0 O 0 Example Paula and Peter live in the same town and it taxes the residents Peter has income of 100k and is taxed 10 of his income 10k Paula has income of 20k and is taxed 20 of her income 4k Is it fair People disagree so do economists said example shows why economists sometimes disagree about public policy 0 Perception vs Reality 0 Some disagreement among economists is inevitable