ECONOMICS 1014 8-20-07

Notes:

Economics: tries to address problems

The science of balancing our needs/wants with limit
How do we do what we do

- SCARCITY: the fact that our resources are limited

o We as humans have many words and many wants. Our wants are
UNLIMITED. And that is our problem.
o So we have to choose which we want/need the most

SCARCITY: Limited Resources

PROBLEM: Many wants
TRADE OFF: Have to choose
COST BENEFIT ANALYSIS: have to weigh all costs, very hard decision but we
All have to do it.
RATIONALITY: know your self interest, we respond to incentives
Must assume people are rational
Must assume each action would make you happy
If something hurt you, assume that you would not do it again
And vice versa.

MODEL: A simplified representation of society/reality

There is a SCIENTIFIC METHOD:

1. Observation: Data is the best way to observe
2. Formulate theory (try to explain)
3. Observation again.

TIPS:
Double check your DATA
You need t group your data and create a formula
You always need to double check your findings and your theory
Don’t ever conclude to FACT
If we want to understand something, focus on it. Don’t get distracted
Always simplify our explanation
A lot of times, observations are obvious cause they are true
If we believe in our theories as, we can convince others
Base your theories on assumptions
 8-22-07
REVIEW:
We have economics because of scarcity.

- SCARCITY: trade offs

- BENEFITS/COST
- RATIONALITY: assume people know they want and what’s best for them
- SCIENTFIC METHOD: See last page…
Once we trust the theory, we can replicate reality
- MODELS: know enough to describe what is going on
- ASSUMPTIONS: Allow us to look at the big picture. Allows us not to be
distracted by detail
Truth – but cannot explain everything
Circular – Flow Diagram

- Assume there are only two groups in the economy

o Households – own factors of production (inputs)

Own labor (they are the workers)

Own land
Own capitol

Consume goods and services

o Firms – use factories of production (inputs)

Use labor
Use land
Use capitol

Produce goods and services

- Assume there are two markets

o 1. Market for factors of production
o 2. Market for goods and services

*Have everything set up… now explain it.

HOW THE MARKET WORKS

• But the flow is inaccurate for two reasons

 o NO GOVERNMENT
o NO INTERNATIONAL TRADE – we imput and export goods

Production Possibilities Frontier: PPF: look for definition in the book

1. Assume only 2 goods: computer, car

2. Assume we use all resources

How much of these 2 products can we produce?

OBSERVATIONS:
Observation #1: C is out of reach because not enough resources
Observation #2: D is bad because we can produce more. We are not using all of our
resources and that is wasteful. Some workers, machines, etc. are not being
used
Observation #3: Using A and B are good. They use the most resources
Observation #3: To switch from A and B, means I produce more cars and fewer
Computers. Because o scarcity. Resources are limited
Observation #4: To produce 100 more cars must sacrifice 200 computers

**Which is better? A or B? **
- Doesn’t matter and I don’t know
- Changes with time: example butter and guns. Depends on other circumstances
going on in the world. We are able to switch from A and B

OPP. COST : What must be given up in order to obtain something desired (an item)
- Slope of curve between A and B.
- Slope A/B
example: 200/100 = 2
- 1 more car = 1 less computer
*****When taking a test, the cost must be in term of good
a. 1 a. 1 comp
b. 2 b. 2 comp
c. 3 c. 3 comp
d. Answer not give d. answer not given
*****Must have