Econ 101 Chapter 1 Notes

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Econ-Class Notes 9/6

Economics: the study of choice under conditions of scarcity * Scarcity-Choices, resources
* Resources:
* Land,
* Labor,
* Capital: physical Plant equipment
* Entrepreneurial ability

Microeconomics vs. Macroeconomics
Micro: Behavior of individual actors on the economic scene
* Households
* Businesses
* Government
Macro: total output, total employment, interest rates, economic growth, the aggregate economy, inflation, trade

Mankiw’s 10 General Principles of Economics:
1. People face tradeoffs
2. The cost of something is what you give up to get it
3. Rational people think at the margin- consider benefits and costs 4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcomes
8. A country’s standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money (assuming full employment) 10. Society faces a short run tradeoff between inflation and unemployment (Purple=Macro)

Scientific Method
1. Observation
2. Economic theory
Economic theory
Assumptions to simplify the problem
a. Theoretical model: and abstract representation of reality i. Model should be as simple as possible to accomplish its purpose 3. Testable hypothesis -fields
4. Empirical testing –econometrics
b. Ultimate purpose of building a model is to predict behaviors

Econ-Class Notes 9/11

Examples of Models
* Supply and demand
* Consumer theory
* Form theory
* Stars circling the earth
* Bleeding to cure illness
* Maps

Fields of Economics
* Markets (bond, stock)
* Monetary economics (banking)
* International economics
* Law & econ (contract law etc..)
* Comparative
* Economic development

Positive and Normative Economics

Positive
* Objective
* Verifiable
* What is
* Descriptive

Normative
* Objective
* What ought to be
* What should be
* Value-ladened
* Prescriptive

Data
2 broad Categories of Data
* Cross sectional- data collected on some variables at a single point in time * Ethnicity
* Home town
* Time Series Data- data collected on some variables at different points in time * Income based on majors
* Weight
Data Issues
1. Poor quality data – beware of sampling error
2. Poor beginning on end points for time series data, the data is not represented by the starting point 3. Population distortion
a. GDP(us) vs GDP (china)
4. Time Series Data: Inflation Distortion
b. Need for constant dollars rather than current dollars 5. Slope Distortion
c. Using more dramatic slopes in presentations can cause misconceptions about the data

Class Notes 9/13
Economics: the study of choice under the conditions of scarcity

Opportunity Cost: the production or consumption forgone when we make decisions to produce or consume something else * Example: going to college
* Accounting $68,000

Opportunity
$124,000
Accounting $68,000

Opportunity
$124,000
Accounting cost
* Tuition: $40,000
* Room and Board: $24,000
* Books: $4,000
* Salary: none
* Opportunity cost
* Tuition: $40,000 that could have been used somewhere else * Room and Board: no opportunity cost, it must be covered some place * Books: $4,000 that could be used somewhere else

* Salary: $80,000
Product Possibility Frontier (PPF):
* Models to illustrate choice, tradeoffs, scarcity, full employment, unemployment or underemployment and efficiency * PPF: path of points showing the maximum amount of 2 goods that can be produced with a given level of resources, technology...
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