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ECON 104

Chapter 1- Economics: Foundations & Models (No such thing as a free lunch) • The economy is doing ok. We need to close the output gap and create jobs for workers • The debt is huge. We need to increase taxes and cut spending. When and how fast should cut the debt • Fiscal Drag- • Two examples of relevance o Subsidize student loans  Raise taxes  Borrow more  Cut spending o Raise minimum wage (compare costs and benefits)  Positives- Move poorAmericans above poverty line, reduce turnover costs and increase productivity, increasing wage would keep minimum wage salary up with inflation  Negatives- Firms would increase prices, unemployment would increase, and workers would be replaced by machines • Economics- The study of the choices people make to attain their goals, given their scarce resources o We make choices because we live in a world of scarcity (unlimited wants exceed limited resources to fulfill wants) o Market- a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade • Three Key Economic Ideas o People are rational  Consumers and firms use all available information as they act to achieve their goals  Weigh benefits and costs of actions  You go see a movie for $7 and it was awful. The decision was not irrational. Exante (before)= >7 and Expost (after)= <7 o People respond to economic incentives  Pay by the hour and not by something else o Optimal decisions are made at the margin  Marginal= extra/additional  MarginalAnalysis- rational people compare MC and MB  How much should airline charge passengers who fly standby? • Plane= 200 seats & Cost to fly= $100,000 • Average cost= 100,000/200 = $500 • Someone comes and says they’ll fly for $300 • MC= 1.25 (peanuts and soda) MB= 300 • MB>MC • Scarcity & Opportunity Cost o Unlimited wants has to do with improving our standard of living o Standard of living is the amount of goods and services we can buy o Factors of Production (scarce)- Land, Labor, and Capital. o Trade-offs- producing more of one good or service means producing less of another o Opportunity Cost- The highest-valued alternative that must be given up to engage in an activity  SupposeApple increases production of ipads.  Ceteris Paribus- Holding everything else constant. Less iphones produced  OC of ipads is iphones o Society has to choose what, how, and who will goods and services be produced o Centrally Planned Economies-An economy where the gov decides how economic resources will be assigned o Market Economy- The decisions of households and firms interacting in markets decide on economic resources  Rely primarily on privately owned firms to produce goods and services and to decide how (markets)  High-income democracies tend to have market economies o Mixed Economy- Amarket economy with more government control o Productive Efficiency- Good or service is produced at the lowest cost o Allocative Efficiency- Where production is in accordance with customer preferences (MC=MB) o Voluntary Exchange- In markets when buyer and seller are made better off by the transaction o Equity- Fair distribution of economic benefits o Economic Variable- Something measurable that can have different values, such as the incomes of doctors • Positive Versus Normative Economics o PositiveAnalysis- Concerned with “what is” o NormativeAnalysis- Concerned with “what ought to be” o Positive Economics- Based on facts that can be tested o Normative Economics- Statements are based on an opinion and are untestable • Macro vs. Micro o Microeconomics- Study of how households and firms make choices, how they interact in markets, and how the gov attempts to influence their choices o Macroeconomics- Study of the economy as a whole, including topics like inflation, unemployment, and economic growth • Appendix o Graphs are used to simplify economic ideas and to make ideas more real so that they can be used for real-world problems o Agraph showing the relationship between price and quantity of a good is a demand curve o Slope of Lines- Change in y/Change in x o Percentage Change- GDP2010 – GDP2009/GDP2009 X 100 Chapter 2 INTRODUCTORY MACROECONOMICANALYSIS & POLICY • Production Possibility Frontier (PPF): o Shows the maximum attainable combinations of two products that may be produces, ceteris paribus o Ceteris Paribus- ALatin phrase that means while certain variables change, “all other things remain unchanged.” o Curve is a straight line. The OC is constant o If you’re inside the curve, you’re in recession because demand is low (attainable but inefficient) o Points on the line are attainable and efficient (using all available resources to maximize output) o Outside the curve is unattainable (we would need more resources) • Opportunity Cost: o The highest valued alternative that must be given up to engage in an activity. (number of iPhones not produced) o Curve is not straight • Increasing Opportunity Cost: o As an economy moves down along PPF, it can experience increasing marginal opportunity costs (because we are taking more resources away) • Assumptions of PPF: o Resources are fixed o Full employment of resources o Technology unchanged • Economic Growth: PPF shifts outward o Economic growth occurs when there is an increase in the  Resource base  And/or technological advance o Result:Acountry’s Standard of Living increases in terms of the number of goods and services available. o Economic growth- Increase in capital and a Technological advance (both increase worker productivity) o Worker productivity= output/hour o Economic growth increases the standard of living o Increase In Resources: Oil, baby boom, increase in capital goods (investment) o TechnologicalAdvance: Converting shale into oil, the internet, computers, innovations of entrepreneurship o Economic Growth- Technological advance that benefits both of the products (outward shift) • SUMMARY o PPF illustrates tradeoffs and opportunity cost o Increasing opportunity costs:  Shape of PPF is bowed or concave to the origin o Economic Growth:  PPF shifts outward  Increases the standard of living o Investment- The use of resources to create or buy new capital/change in capital stock. CHAPTER 3: WHERE PRICES COME FROM • The Product Market o Demand Curve: Households purchase goods and services o Supply Curve: Firms supply goods and services o Market Equilibrium: Quantity demanded equals quantity supplied • The Law of Demand o There is an inverse relation between the price of a good and quantity demanded, ceteris paribus o Shifts in Demand occurs when there is a change in  The number of buyers  Income  Expectations of future prices  Tastes and preferences  Interest rates- When they’re low, demand shifts right o Achange in demand versus a change in quantity demanded  As price falls- a change in quantity demanded  As income increases- point off the curve; at every price, quantity demanded is higher; change/increase in demand • The Law of Supply o Positive Slope o There is a direct relation between the price of a good and the quantity sellers are willing to offer for sale, ceteris paribus o Shifts in Supply  The Law of Supply: There is a direct relation between the price of a good and the quantity sellers are willing to offer for sale, ceteris paribus.  AShift in Supply occurs when there is a change in: • The number of firms in the market • Prices of inputs • Technological change • Expected future prices • Market Equilibrium o Where supply and demand intersect- Where buyers and sellers agree on P&Q o If not ME, it’s a Shortage or Surplus (determines which way prices go) o Shortage:As Price Increases, Demand Decreases o Surplus:As Price Increases, Demand Increases o Increase in demand  Increase in *P and *Q • Appendix: The Minimum Wage Chapter 8-
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