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Muzzi SG1 ch 1-5.docx

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University of San Francisco

1 What is economics?  production, allocation, distribution of resources in a scarce world Macro:  aggregation/ generalization of markets  average of the cost of living  ex. all jobs in SF, all goods & services produced Micro:  individuals  ex. automobile ind. globally Why study macro? 1. democracy--so you can be an informed voter and find the least harmful option 2. learn how markets work 3. to think like an economist 4. global perspective and informed citizen of the world Economics is a social science What is a science?  uses hypothesis and theories to find causal relationships using data and tests Subject matter?  humans and predicting their behavior using theories Assumptions about humans?  rational  do what is most beneficial to them  herd theory Goal:  predict behavior efficiently  maximize what you get out of a set # of resources Models:  explain concept  simplification of real world Causation v. correlation  correlation without causation o ex. brushing your teeth then falling asleep  try to prove its not correlation but causation Positive v. normative  positive statement o prove/ disprove with facts & data  normative 2 o opinion History of Economic Thought pre-mercantilism  Ancient Greece o Plato  abolish property rights  property given to philosopher kings—smart  disband families kids go to smart citizens o Aristotle  disagreed  theories through observation  people take better care of things when they own it Mercantilism  Renaissance o accumulation of wealth by accumulating as much gold as possible 1. export & don’t import when trading with foreigners 2. acquire territory (real estate) 3. enslave people and make them work Critics  Thomas Mun o inflation—mercantilism can bring up process  David Hume o mercantilism has no logic o specie flow mechanism  export, don’t import =  gold  money supply = price of domestic goods  price of domestic goods = exports imports  Adam Smith o free market capitalism o gold does not equal wealth. it is but a medium of exchange  doesn’t clothe, shelter, feed you o wealth = productive capacity o Assumptions about humans:  everyone wants to better their condition (calmly, not always aggressive)  business & commerce is natural and unique to humans  people do not do things out of benevolence but primarily for a profit  when it is out of benevolence it is because we can identify with them (sympathy) – theory of moral sentiment o Invisible hand  basis of best way to distr. goods  pushes people to do what society wants  ex. if you suck at singing you will not be a singer  in a market based econ, individual self interest is guided towards common societal good  capitalism (market, laissez faire) vs. communism (people decide for you) o Division of labor  time of enlightenment and science 3  industrial rev,  specialized labor – produce more o Proper role of govt  laissez faire, minimal govt, market, allows for invisible hand 1. national defense 2. provide judicial system and enforce laws 3. provide certain public goods a. infrastructure 4. provide basic level of edu to citizens *the more we specialize the more stupid we become Production Possibility Frontier  Assumptions  MODEL #1 grapes & cows o resource: land o output: cattle & grapes  Increasing vs, constant costs o some land more suited for grapes o heterogeneous: opp. cost grows, slope changing o homogeneous: slope and opp. cost constant Trade  Assumptions  MODEL #2 England & Portugal  Absolute advantage: o productivity, more productive o Adam Smith—England can only trade with Portugal when both have absolute advantage-- wrong  Comparative Advantage: o David Ricardo o opp. cost--- put whatever youre asking for in the bottom, set D to 1  Expansion v. contraction *graph 1. changes in tech (make curve contract at first then expand) 2. increase physical capital 3. increase in human capital 4. # of labor 5. weather 6. political and legal stability 7. quantity of land *calculations (makes 5 kegs, stopped and asked to make t shirts)  Specialize o make only the good you have comparative adv. in o *coordinates o autarky: trade for your own consumption  Terms of trade o has to be between both countries opp. cost 4  Application to everyday life o comparative adv. – assistant and lawyer o trade benefits all Supply & demand  Assumption: o ceteris paribus --stress this!!!!  all things constant  Law of demand *graph o cheap > buy more, demand more (P = QD )  why? – relatively less expensive than before  substitution effect: we substitute the cheaper good for more expensive things  income effect: we feel richer so we buy more o more expensive > demand less (P = QD) o graph*  Law of supply o prices go up = produce more (P = QP) o P = QP o why?  incentive effect:  higher prices > work more > produce more (profit)  lower prices > work less > produce less  opportunity cost effect:  resources heterogeneous, increasing  price goes up to compensate for increase in Q  Equilibrium o QD=QS o shortage = prices has to go up o surplus = price has to go down o positive change = right o negative change = left o *gra
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