ECON 201 Lecture 1: Lesson 1

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12 Feb 2016
The best definition of economics was given by Christopher Sims and states:
Economics, at its best, is a set of ideas and methods for the improvement of society. It is not,
as so often seems the case today, a set of ideological rules for asserting why we cannot face
the challenges of stagnation, job loss and widening inequality.
Economics is a social science. It is social in a way that it is concerned with ideas that may
improve society and it’s scientific in its approach (use of mathematics, models, and data and
statistical methods): translation of ideas into formal models through mathematics, and testing
the ideas/models through the use of statistical methods.
Challenges of today include: unemployment rates are at an all time high, government balance
sheets are in disarray, inequality is on the rise and we are also facing overpopulation, climate
change, political instability and globalization.
But there is good news: higher literacy rates, lower child mortality, family size is a fraction of
what it was 50 years ago, prosperity is on the rise in much of Asia, life expectancy is
increasing universally and death through wars are declining.
Macroeconomics studies the economy as system in which feedbacks among sectors determine
national output, employment and prices.
Microeconomics is the study of individual behavior in the context of scarcity
Most modern economies are mixed economy meaning that goods and services are supplied
both by private suppliers and government.
A model is a formalization of theory that facilitates scientific enquiry. A theory is a logical
view of how things work and is frequently formulated on the basis of observation.
Frequently, we transform theories into models and test the theories in this way by confronting
them with data and statistical analysis.
The opportunity cost of a choice is what must be sacrificed when a choice is made.
Example of fish and vegetable:
Zoe’s opportunity cost is 1:2 because if she stops producing vegetables she can concentrate
on fish and she catches twice as much fish than vegetables.
PPF refers to production possibilities frontier. If we create a graph showing the PPF, we get a
straight line going from the horizontal to the vertical axis. The line is the PPF and anything
before this is inefficient and anything after this is impossible.
In Amanda and Zoe’s case, they each have an absolute advantage in the production of one
If you specialize in the good where you are more efficient then should be some gain in the
economy rather than devoting half of your time to the good where you are less efficient. This
is the case with Amanda and Zoe. Hence if they trade, after specialization, they each have the
potential to consume more.
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