Rocks and Shoals

Tips on getting through this course.

Skim read the assignments before class
This an foundation knowledge course
that means we will be building on this
base in future courses
Reading the material the night before
the exam will invariably lead to a
poor grade.

Keep up with the homework questions.

They are key to doing well on the exams.
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Rocks and Shoals

Attendance; key to learning
ECN 221 lectures involve some complex material.
Missing class discussions will affect exam performance.

Class Participation
ASK QUESTIONS if something is not clear.
Your ability to compete is largely a function of knowledge,
preparation, and participation.

Email
I use email to communicate important information to
students. Make certain your email account is able to
receive mail.
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A Final Thought on Exams

Life is not fair.
Honesty is still the best policy.
Call or email me if your world blows up
just before exams. We can always work
something out.
If you dont it means you get Exam
Version 2 which is the nightmare exam.
Proper prior planning prevents poor
performance
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LECTURE #1: MICROECONOMICS

CHAPTER 1
Ten Principles
Economics as Science
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Economics & Scarcity

Society allocates people, land, buildings,
and machines to various productive tasks.
It also allocates the output of goods and
services produced.
Society decides who will eat caviar and
who will eat potatoes. It must decide who
will drive a Ferrari and who will take the
bus.
Allocation is necessary because goods and
services are scarce relative to the demand
for those same goods and services.
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Economics & Scarcity

Scarcity means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have. Just
as each member of a household cannot get
everything he or she wants, each individual in
a society cannot attain the highest standard of
living to which he or she might aspire.
Economics is the study of how society
manages its scarce resources. How are
resources allocated and who makes the
allocation decisions is the subject of
economics.
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Ten Principles of Economics

How People Make Decisions
1. Decision makers face trade-offs.
"Guns vs. Butter" argument
Clean environment vs. high levels of income argument
Efficiency vs. Equality: dividing the pie the role of gov't

2. All things incur opportunity costs

What must you give up in order to get something else?

3. People are economically rational

Decision making at the margins
The concept of marginal costs vs marginal benefits

4. Incentives Matter
What induces a person to act?
Government Policy and Social Objectives
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Ten Principles of Economics

How People Interact
5. Trade makes every one better off
Comparative advantage and opportunity costs

6. Free markets are the most efficient way to

organize economic activity
Moving the allocation and production decisions to the
individual
Price are an important allocation criterion

7. Governments can sometimes improve market

outcomes
The key word is 'sometimes'
The property rights issue
Market power: ability to influence outcomes
Market failure: inefficient allocation of resources
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Ten Principles of Economics

How The Economy As A Whole Works
8. The Standard of Living reflects the ability to
produce goods and services
What causes differences in the standard of living across
countries?
Why is productivity important?
Why are property rights and stable democratic governments
necessary?

9. Governments can upset the economic cart

Financing public services by printing money >>> inflation

10. Is there a short-term trade-off between Inflation

and Unemployment
What causes inflation: too much money or too much demand
or both?
Does the economy need some level of inflation to work?
The role of governmental policy
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Break Time

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Economist as
Scientist/Investigator
Chapter 2

Economics = Science =>

Economist=Scientist
The Scientific Method

Collect Data (observation or experimentation)

Formulate Behavioral Hypotheses
Make Predictions (attention to role of
uncertainty)
Run Experiments to prove/disprove behavioral
hypotheses.
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Economist as
Scientist/Investigator
Chapter 2
The Role of Assumptions
Simplifying facts about the world around us
Identifying the essential elements of the few to
generalize about the many

The Role of Models

Models are used to describe the way the world
works
Models consist of diagrams and equations
Example 1: The Circular Flow of Money and
Goods (Figure 1)
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Circular Flow of Money and Goods

Factor Inputs and Outputs
Diagram is a schematic
representation of the
organization of the
economy. Decisions are
made by households and
firms. Households and
firms interact in the
markets for goods and
services and in the
markets for the factors of
production. The outer set
of arrows shows the flow
of dollars, and the inner
set of arrows shows the
correspon-ding flow of
inputs and outputs.
G. Mankiw

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Production Possibilities Frontier

Production possibilities frontier
A graph showing the various
combinations of output that the
economy can possibly produce
Given the available
Factors of production (labor,
capital, materials)
Production technology (capital
intensity)
G. Mankiw*

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Production Possibilities Frontier

Quantity of
Computers
Produced
C

3,000

2,200
2,000

Production
Possibilities
Frontier

1,000

E
0

300

G. Mankiw

600 700

1,000 Quantity of
Cars
Produced

The production possibilities

frontier shows the
combinations of output - in
this case, cars and
computers - that the
economy can possibly
produce.
The economy can produce
any combination on or
inside the frontier.
Points outside the frontier
are not feasible given the
economys resources.

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Productivity
Technological advance
Outward shift of the production
possibilities frontier
Economic growth
Produce more of both goods

G. Mankiw

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3
A shift in the production possibilities frontier
Quantity of
Computers
Produced
4,000
3,000
G

2,300
2,200

0
G. Mankiw

600 650

A technological advance in
the computer industry
enables the economy to
produce more computers
for any given number of
cars. As a result, the
production possibilities
frontier shifts outward. If
the economy moves from
point A to point G, then the
production of both cars and
computers increases.
1,000 Quantity of
Cars Produced
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Economist as Policy Advisor

Chapter 2
The Positive vs. Normative [Argument]
Positive the way things are (descriptive)
Normative the way things ought to be (prescriptive)

Business Week (April 27: "What Good Are Economists

Anyway?)

"Why they failed to predict the global economic crisis

and why their help is critical to a recovery ."

The "reality" predicting the future is more art than
science. A lot has to do with our assumptions and
our experiential memories.
Thomas Sargent (NYU): "the economy is volatile, in
part, because households and businesses hold
'fragile beliefs' that shift quickly." (pg 031)

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Sources of Disagreement among

Economists
Chapter 2

Differences in Scientific Judgments

(opinions regarding interpretation)
Differences in Measuring Impact of
Policy
The problem of perception versus
reality

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A Quick Review of Graphing

Chapter 2

Cause (X-axis) and Effect (Y-axis)

Magnitude (Y) and Time (X)
Grade Point Average (Y) and Time
Spent Studying (X)
Slope and Intercept
Slope = the rate of change in Y given a
change in X (y / x)
Intercept: The value of Y when X = zero.
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Homework Assignment
Chapter 1:
Questions for Review: 1, 3, 4, 6, 8, 9
Problems and Applications: 1 (parts a, b,
c, and e), 8, 12 (parts a and b)

Chapter 2:
Questions for Review: 2, 3, 4, 7, 9
Problems and Applications: 4 (parts a, b),
6
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