The Five Foundations of Economics

Topics: Supply and demand, Economics, Elasticity Pages: 6 (1823 words) Published: July 20, 2013
Chapter 1 – The Five Foundations of Economics

Scarcity: The limited nature of society’s resources
Economics: The study of how people allocate their limited resources to satisfy their unlimited wants •Time, energy, and financial cost toward acquiring materials •Air and gravity are examples of things we don’t worry about, or aren’t scarce •The ability to look at the benefits of the activity and weigh it against the cost is thinking like an economist •Making choices is all about comparing cost and benefits rationally •People who use cost and benefits do (and don’t) make rational choices •Does the fact that some people make apparently irrational choices invalidate the rationality assumption in Econ? No. •Irrational people make unpredictable decisions

Economic models try to be applied to irrational people too •We focus on rational acts to understand irrational acts
No one has consistent behavior, even if the people are rational •People value variety and change -> Don’t always stay with the same choice •Can change behavior by altering incentive structure where they already make their choices in •Positive and negative incentives (Ex: grades)

Direct and indirect incentives [Ex: born on July 1 (in Australia, they give $1000 to help pay for kids)] •Patents give companies an incentive to research to come up with their own idea (right incentives -> more innovations) •Life is about trade offs (Ex: college vs. working / cleaner environment vs. more production) •Opportunity cost: Highest valued alternative that must be given up to engage in an activity -> “what you give up” -> WHAT IF question •Ex: The opportunity cost of going to the ER is higher during a Red Sox game; the amount of people during a Red Sox game going to the ER is low •Marginal Thinking: Evaluate whether the benefit of one more unit of something is greater than its cost •Ex: It takes more energy to rid a dust bunny under the couch, but the benefit is low, as opposed to a dust bunny on floor, we want to immediately get rid of it because the benefit is higher -> Decision: Do spring cleaning once a year •Trade & Comparative Advantage: Life is about finding what you do well and trading them off with someone who isn’t specialized in it (find things you’re comparatively good at) •Specialization is about finding your passion and finding others to help you with everything else

Chapter 2 – Model Building & Gains from Trade

Positive Analysis: Making series of statements that are testable •Normative Analysis: Using an opinion in a policy
Restrict statements that can be tested (basically a hypothesis) •Set aside beliefs and opinions; good to have a point of view but bad to be biased •Microeconomics focuses in each individual part of the economy •Macroeconomics involves learning how to tell when the individual pieces are functioning correctly and what can be done to fix any problems •If you know how each part works, it’s easier to fix the economy •Economic models are simplistic, but can bring out essential concepts •Ceteris paribus: Change only one variable at a time (holding other things constant”) •Can’t say anything about models if they’re too simple/complex •We judge models by how well they make predictions

Endogenous: In the model (can control variables); Ex: size of wings •Exogenous: Outside of the model (can’t control variables); Ex: wind, storm •Dangers of faulty assumptions -> needs to be realistic and consider all factors •Financial cost vs. time spent

8 hours8 hours(Time)
x $8/hourx $8/hour(Time value of money)
+ $464+ $584
Need financial cost, time spent traveling, and value of a person’s time to figure out whether, for example, one should take the plane or bus •Opportunity cost to see Kanye West vs. Metallica (would pay $200 for Kanye; costs $135 for Metallica); giving up $65 in value to see Kanye •The fact that we are in Econ now...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Economics Foundation Essay
  • economics Essay
  • Economics Essay
  • economics Essay
  • business economics Essay
  • Economics Essay
  • Foundation in Economics Essay
  • Essay on Economics

Become a StudyMode Member

Sign Up - It's Free