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What is Economics?
Economics studies how individuals, firms, the
government, and other organizations make choices and how those choices determine societys use of its resources.
incentives
exchange information
distribution
Trade-off
All choices involve trade-offs.
Incentives
Incentives are benefits that motivate a
Exercise 1
How does each of the following affect the incentive to go to college?
a) b) c) d)
An increase in tuition costs. A fall in the interest rate on student loans. A rise in wages for unskilled jobs. An increase in incomes of college graduates.
Exchange
Exchange is the trade of goods and services.
goods and services to produce. A market is any situation in which an exchange takes place.
Information
Making informed choices requires
information. Information is like any other good or service. Information is unlike any other good or service.
Distribution
Markets determine who gets which goods
according to the demand and supply of goods, labor, and capital. For whom are goods produced.
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consumers workers
investors
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households and firms and the detailed study of prices and production in specific industries.
Macroeconomics: focuses on the behavior of
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Assumptions or hypotheses and the conclusions derived from them. Theories are logical exercises that lead from assumptions to conclusions. If the assumptions are correct, then the results follow.
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uses word BE
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Profit-maximizing firms
Competitive markets Government is ignored for now
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Rational Individuals
Scarcity forces us to make choices.
what they see as their own self-interest weigh costs and benefits as they see them if benefits > costs, take the action different people have different interests
Competitive Markets
Many firms sell identical products to many
consumers. Firms and consumers are price takers. Firms provide as much output as consumers will buy. Each firm can sell as much as it wants.
the size of the firm is small compared to the size of the market
they lose all their customers. All firms in the industry charge the same price - the market price.
Modern Economics Thinking Like an Economist lecture by Veronika Mikov 18
Combines self-interested consumers, profit-maximizing firms, and competition. This model can provide answers to the four basic questions:
1.
2.
3. 4.
What is produced, and in what quantities? How are goods produced? For whom are those goods produced? Who decides the answers to the first three questions, and how?
Scarce resources are not wasted. It is not possible to produce more of one good without producing less of another good. It is not possible to make one person better off without making someone else worse off.
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Exercise 2
A rational consumer is often said to be which of the following? a) self-interested b) capable of making better choices than other consumers c) liable to make decisions without weighing trade-offs d) None of the above.
Opportunity Sets
Opportunity sets are combinations of goods.
combinations of goods are attainable. The opportunity set is limited by budget or time constraints.
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Budget Constraint
Michelle has $120 to spend on either CDs or
CDs 0 2 4 6 8 10 12
lecture by Veronika Mikov 23
Exercise 3
Kathy has $20 a week to spend; she spends it either on junk food at $2.50 a snack, or on gasoline at $1 per gallon. Draw Kathys opportunity set. What is the trade-off between junk food and the gasoline?
Exercise 3 cont.
Now draw each new budget constraint she would face if
a)
b) c)
a kind relative started sending her an additional $10 per week; the price of a junk food snack fell to $2; the price of gasoline rose to $2.50 per gallon.
In each case, how does the trade-off between junk food and gasoline change?
Time Constraint
The sum of what an individual spends her
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Exercise 4
Suppose that you have 24 hours to split between studying, sleeping, and skiing. Which of the following is not in your opportunity set? a) 6 hours of studying, 10 hours of sleeping, and 6 hours of skiing. b) 7 hours of studying, 10 hours of sleeping, and 6 hours of skiing. c) 8 hours of studying, 9 hours of sleeping, and 6 hours of skiing. d) 9 hours of studying, 9 hours of sleeping, and 8 hours of skiing.
or societys opportunity set, representing the possible combinations of goods that it can produce. Lets consider guns (military spending) and butter (civilian spending).
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Butter
(millions of tons)
0 40 70 90 100
lecture by Veronika Mikov 29
steel makes great guns, no butter; cows do not make good weapons
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Exercise 5
Draw the production possibility frontier according to data provided.
choice food machines
A
B C D E F
0
10 20 30 40 50
150
140 120 90 50 0
So points interior to the curve are inefficient. Economists want to know the source of these inefficiencies, what resources are unemployed.
curve.
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Exercise 6
The opportunity set describes which of the following? a) what an individual or firm wants to do b) what an individual or firm should do c) what an individual or firm is doing d) what an individual or firm can do
fixed amount of other inputs increases the output, or amount produced, but by less and less.
you get more out of the first hour of studying than the tenth
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Opportunity Costs
the cost of using any resource
possibilities curves illustrate the cost of one option in terms of the other: opportunity cost.
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Opportunity Costs
The cost of an education is:
Tuition Room and board Books Travel expenses Opportunity cost: lost earnings from not working for three years
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Sunk Costs
a past expenditure that cannot be recovered,
no matter what choice is made in the present rational decision makers ignore them
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Marginal Costs
the additional cost of producing or consuming
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2. Define trade-offs.
3. Calculate the costs correctly, ignoring sunk
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Exercise 7
Why is the opportunity cost of a woman with a college education having a child greater than the opportunity cost of a woman with just a high school education having a child?
Exercise 8
Characterize the following events as microeconomic, macroeconomic or both.
a) b)
c)
d) e) f)
Unemployment increases this month. A drug company invents and begins to market a new medicine. A bank lends money to a large company but turns down a small business. Interest rates decline for all borrowers. A labor union negotiates for higher pay. The price of oil increases.
Exercise 9
Provide examples to the following economic areas: a) microeconomics b) macroeconomics c) positive economics d) normative economics e) budget constraint f) time constraint g) production possibility frontier h) opportunity costs i) sunk costs j) marginal costs