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Chapter 1

Microeconomics Chapter 1.docx

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New York University
Jennifer Berg

Microeconomics 200 - Tuesday, July 16th notes. Chapter 1 Economics - The allocation of scarce resources Scarcity - Since everyone has unlimited desires, all these desires can’t be met due to the limited resources available, forcing people to make choices. Things that are scarce: Time, Spending Power, Natural resources (land, atmosphere, oil, water, etc.) Opportunity Cost Opportunity cost - what must be given up in order to have something (or what must be foregone). Opportunity costs consists of explicit costs and implicit costs -> explicit costs - direct payment of something (fees, books, tuition, etc.) -> implicit costs - value of what’s foregone (value of time, value of lost sleep, etc.) Entities Under Scarcity * Households allocate limited income among goods & services. * Business firms choices of what to produce and how, much are limited by costs of production. * Government agencies work with limited budgets and must make careful choices of which goals to pursue. Positive vs Normative Economics Positive economics - study of how the economy works. (fact based) statements of how the economy works, but must be proved or disproved. E.x: government-provided health care improves public expenditures. E.x: If wages go up, do people work more or less? Normative economics - what sort of outcome someone wants in an economy. (subjective-value based, opinion) that need not be proven, since it is an opinion. Key world is “should” - Used to make value judgements, identify solutions, and prescribe solutions. E.x: “Wages are too low, they should be higher.” Why Economists Disagree * They disagree on how the economy works (positive nature) - our knowledge of the economy is imperfect - certain facts are up for dispute * In most cases, though, the disagreement is normative in nature because of Models (Abstract representations of reality, used a lot by economists). Assumptions SimplifyingAssumption - way of making a model simpler without affecting any of its important conclusions. (of course, these can be applied to broader aspects) E.x: PPF (Production Possibilities Frontier) CriticalAssumption -Affects conclusions of a model in an i
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