ECON 2313: Fall Semester , 2008
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Transcript of ECON 2313: Fall Semester , 2008
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ECON 2313: Fall Semester, 2008Welcome!
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Economics is the studyof how individuals and
societies allocatescarce resources amongcompeting alternative
ends
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Available resources are insufficient to satisfy wants.
We cannot produce enough goods and services to satisfy
everyone—we don’t have the resources!
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What to produce?
Because resources are scarce, growing more corn means growing less wheat, building more SUV’s means
building fewer military vehicles, and building more prisons means we have to sacrifice something else—
like new schools.
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Congress made supplemental
appropriations for the Iraq effort of $110 billion June
2003 and March 2004. We should ask the question: what could we have for
$110 billion?
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• 628 Boeing 7E7 Aircraft• Construct three (3) 700 mile bullet trains (includes
the cost of inner-city land acquisition). • 4,075 “high quality” educational facilities to
accommodate 1,000 students.• Write a $379 check to every U.S. citizen.• Fund 1,000 universities the size of Arkansas State
for one year.
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Economics Webster’s Ninth New Collegiate Dictionary. eco• nom • ic 1. archaic: of or relating to a household or its management. eco = oikos, meaning “house” or “household” nom = nemein, meaning “to manage” ic = ic, mean “of” or “relating to”
The geneology of economics
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The production of goods and services
is impossible without economic
resources or factors of production
Economic Resources
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Land or natural resources
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Labor or “human resources”
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Capital or “manmade instruments of production”
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Human Capital
Human capital is the knowledge and skill people obtain from education, on-the-job training, and work experience.
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Entrepreneurship Entrepreneurship is the willingness and ability to combine land, labor and capital into productive enterprises.
• Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage.
• Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.
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Income received by owners of economic resources
• Rent: Income paid for the use of land.• Wages (and salaries): income paid for the
services of labor.• Interest: income paid for the use of
capital.• Profit (or loss): Income earned by an
entrepreneur for running a business.
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Goods and Services
• Good: see, feel, touch• Service: intangible• Scarce good/service
– The amount people desire exceeds the amount available at a zero price
• Choice– Give up some goods and services
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Goods and Bads
• Bads– We want none of them; not even at a zero price
• Free goods and services• “There is no such thing as a free lunch”
– Involve a cost to someone
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Economic Decision Makers
• Households– Consumers
• Demand goods and services– Resource owners
• Supply resources
• Firms, Governments, Rest of the World – Demand resources– Produce goods and services
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Markets
• Bring together buyers and sellers• Determine price and quantity• Product markets
– Goods and services• Resource markets
– Resources
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A Simple Circular-Flow Model
• Flow of – Resources– Products– Income– Revenue
• Among economic decision makers
• Interaction– Households– Firms
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Exhibit 1The simple circular-flow model for households and firms
Households - Supply resources to resource market; earn income - Demand goods and services from product market; spend income
Firms - Demand resources to produce goods and services; payment for resources - Supply goods and services to product market; earn revenue
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The Art and Science
of EconomicsEconomists assume that economic
decision-makers are rational and engage
in “maximizing” behavior
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Choice Requires Time and Information
• Time and information – scarce; valuable• Rational decision makers
– Willing to pay for information• Improve choices
– Acquire information:• Additional benefit expected exceeds the additional cost
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Economic Analysis Is Marginal Analysis
• Expected marginal benefit• Expected marginal cost• Marginal
– Incremental, additional, extra• Rational decision maker:
– Change the status quo if expected marginal benefit exceeds expected marginal cost
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Microeconomics and Macroeconomics
• Microeconomics– Individual economic choices– Markets coordinate the choices of economic
decision makers– Individual pieces of the puzzle
• Macroeconomics– Performance of the economy as a whole– Big picture
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Economics deals with questions of “what is”
and “what ought to be.” The former set of
questions belong to positive economics; the
latter to normative economics
Positive and normative economics
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Positive economics attempts set forth scientific statements--that is, statements subject to verification or falsification
For instance:
• “ If they raise tuition again at ASU, enrollment will decline.”
• The recent rise in interest rates is likely to depress housing construction.
• Total employment in the U.S. fell in the year 2002.
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It’s unfair to ask a person
to live on $6.55 an hour.
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I shouldn’t have the government telling me how much I should pay for fast
food cooks or any other type of labor service.
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Who is right? It is a normative issue.
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The Scientific Method: Step by Step
1. Identify the Question and Define Relevant Variables
2. Specify Assumptions
or
3. Formulate a hypothesis
4. Test the hypothesis
Reject the hypothesis
Use the hypothesis until a better one shows up
Modify Approach
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An economic model is a simplified substitute
for economic reality.
What is an Economic Model?
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This map of Arkansas is a good example of a “model”
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Ceteris Paribus “All other things being equal” or “All other factors held constant.”
Simplification in model building is achieved by the ceteris paribus assumption. It allows us to reason about
the relationship between two variables without the
intrusion of other variables.
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Economic reasoning:Some pitfalls
• Association-is-causation fallacy
• Fallacy of composition
• Ignoring secondary effects
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Correlation versus Causation
Correlation is the tendency for the values of two variable to move in a
predictable and related way. For example, beer consumption tends to
rise when unemployment rises—that is, these variables are correlated. Does it follow that beer consumption causes
unemployment?
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• Researchers at the Aabo Akademi found that Finns who speak the language of their Nordic neighbors were up to 25 percent less likely to fall ill than those who do not.
• My rooster died—the sun won’t come up tomorrow.
• Crimes rates tend to be higher in cities with more police per capita.
Association-is-causationfallacy: More examples
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To commit the fallacy of composition is to suppose that what is true in the individual case also holds true for the group.• Example: “The best way to leave a burning
theater is to run for the exit.”
Fallacy of composition
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Secondary effectsThe imposition of a luxury tax in 1990 (for items priced $100,000 or more was blamed for destroying jobs in the yacht-building industry.