Microeconomics 200 - Tuesday, July 16th notes.
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 - 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